As the book profit based on Ind AS
compliant financial statement is likely to be different from the book profit
based on existing Indian GAAP, the Central Board of Direct Taxes (CBDT)
constituted a committee in June, 2015 for suggesting the framework for
computation of minimum alternate tax (MAT) liability u/s. 115JB for Ind AS
compliant companies in the year of adoption and thereafter. The Committee
submitted first interim report on 18th March, 2016 which was placed
in public domain by the CBDT for wider public consultations. The Committee
submitted the second interim report on 5th August, 2016 which was
also placed in public domain. The comments/ suggestions received in respect of
the first and second interim report were examined by the Committee. After
taking into account all the suggestions/comments received, the Committee
submitted its final report on 22nd December, 2016. Based on the
final recommendation of the committee, the Finance Bill, 2017 prescribes
framework for levy of MAT on Ind-AS companies.
Reference Year for FTA adjustments
Among other matters, the reference
year for FTA adjustments is clarified in the proposed final provisions. In the
first year of adoption of Ind AS, the companies would prepare Ind AS financial
statement for reporting year with a comparative financial statement for
immediately preceding year. As per Ind AS 101, a company would make all Ind AS
adjustments on the opening date of the comparative financial year. The entity
is also required to present an equity reconciliation between previous Indian
GAAP and Ind AS amounts, both on the opening date of preceding year as well as
on the closing date of the preceding year. It is proposed that for the purposes
of computation of book profits of the year of adoption and the proposed
adjustments, the amounts adjusted as of the opening date of the first year of
adoption shall be considered. For example, companies which adopt Ind AS with
effect from 1st April 2016 are required to prepare their financial
statements for the year 2016-17 as per requirements of Ind AS. Such companies
are also required to prepare an opening balance sheet as of 1st April
2015 and restate the financial statements for the comparative period 2015-16.
In such a case, the first time adoption adjustments as of 31st March
2016 shall be considered for computation of MAT liability for previous year
2016-17 (Assessment year 2017-18) and thereafter. Further, in this case, the
period of five years proposed above shall be previous years 2016-17, 2017-18,
2018-19, 2019-20 and 2020-21.
The above provisions are slightly
confusing because, the FTA adjustments are made at 1st April 2015,
whereas the final provisions allude to FTA adjustments at 31 March 2016 to be
considered for computation of MAT. Does that mean that the FTA adjustments made
at 1st April, 2015 are trued up for any changes upto the end of the
comparative year, i.e, 31st March 2016?
This article provides
clarification on how this provision needs to be interpreted.
Impact of Ind AS FTA Adjustments on MAT
The accounting policies that an
entity uses in its opening Ind AS balance sheet at the time of FTA may differ
from those that it previously used in its Indian GAAP financial statements. An
entity is required to record these adjustments directly in retained
earnings/reserves at the date of transition to Ind AS. The Committee noted that
several of these items would subsequently never be reclassified to the
statement of P&L or included in the computation of book profits.
The final provisions on MAT for
FTA adjustments in Ind AS retained earnings on the opening balance sheet date
that are subsequently never reclassified to the statement of P&L are
summarised below. It may be noted that those adjustments recorded in other
comprehensive income and which would subsequently be reclassified to the profit
and loss, shall be included in book profits in the year in which these are
reclassified to the profit and loss.
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Items
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The point of time it will be
included in book profits
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Changes in revaluation surplus of Property, Plant or Equipment
(PPE) and Intangible assets (Ind AS 16 and Ind AS 38). An entity may use fair
value in its opening Ind AS Balance Sheet as deemed cost for an item of PPE
or an intangible asset as mentioned in paragraphs D5 and D7 of Ind AS 101.
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This item is completely kept MAT neutral based on the existing
principles for computation of book profits u/s. 115JB of the Act. It provides that in case of revaluation of
assets, any impact on account of such revaluation shall be ignored for the
purposes of computation of book profits.
Therefore changes in revaluation surplus will be included in
book profits at the time of realisation/ disposal/ retirement or otherwise
transfer of the asset. Consequently, depreciation shall be computed ignoring
the amount of aforesaid retained earnings adjustment. Similarly, gain/loss on realisation/
disposal/ retirement of such assets shall be computed ignoring the aforesaid
retained earnings adjustment.
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Investments in subsidiaries,
joint ventures and associates at fair value as deemed cost
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An entity may use fair value in its opening Ind AS Balance Sheet
as deemed cost for investment in a subsidiary, joint venture or associate in
its separate financial statements as mentioned in paragraph D15 of Ind AS
101. In such cases retained earnings adjustment shall be included in the book
profit at the time of realisation of such investment.
Therefore this item is also completely kept MAT neutral from the
perspective of existing treatment.
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Cumulative translation differences
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An entity may elect a choice whereby the cumulative translation
differences for all foreign operations are deemed to be zero at the date of
transition to Ind AS. Further, the gain or loss on a subsequent disposal of
any foreign operation shall exclude translation differences that arose before
the date of transition to Ind AS and shall include only the translation
differences after the date of transition.
In such cases, to ensure that such Cumulative translation
differences on the date of transition which have been transferred to retained
earnings, are taken into account, these shall be included in the book profits
at the time of disposal of foreign operations as mentioned in paragraph 48 of
Ind AS 21.
Therefore this item is also completely kept MAT neutral from the
perspective of existing treatment.
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Any other item such as remeasurements of defined benefit plans,
decommissioning liability, asset retirement obligations, foreign exchange
capitalisation/ decapitalization, borrowing costs adjustments, etc
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To be included in book
profits equally over a period of five years starting from the year of first
time adoption of Ind AS.
Section 115JB of the Act
already provides for adjustments on account of deferred tax and its
provision. Any deferred tax adjustments recorded in Reserves and Surplus on
account of transition to Ind AS shall also be ignored.
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Examples clarifying how the MAT
adjustments will be made
The Company is in Phase 1. It’s
transition date is April 1, 2015. The year of Ind AS adoption is financial year
2016-17 and the comparative period is financial year 2015-16. On the transition
date the company makes the following adjustments in the opening retained
earnings.
1. The Company applies the fair
value as deemed cost exemption and revalues the fixed assets from Rs 100
million to Rs. 150 million. On a go forward basis the Company will apply the
cost measurements basis for accounting purposes and the opening cost of fixed
assets will be Rs.150 million under Ind AS.
2. The Company has investment in two
subsidiaries, whose cost at April 1,
2015 is Rs. 60 million (Subsidiary 1) and 70 million (Subsidiary 2). On the
transition date the Company records the investments at fair value, Rs. 80
million and Rs. 85 million, respectively, which is the new deemed cost. On a go
forward basis, the investments will be recorded at the deemed cost. During the
financial year, 2015-16, the Company sells Subsidiary 1 at Rs. 82 million.
3. The Company has investments in
equity mutual funds. Under Ind AS, investments in equity mutual funds are
marked to market and the gains/losses are recognized in P&L. Under Indian
GAAP, the book value of investments in the mutual funds is Rs. 215 million. The
fair value at transition date (1st April, 2015) is Rs. 220 million
and at the end of comparative period (31st March 2016) is Rs 225
million.
4. The fair value of the above
equity mutual fund at end of 31st March 17 increased by Rs. 7
million and at end of 31st March 18 decreased by Rs. 3 million.
Solution
1. The fair value uplift of fixed
assets of Rs. 50 million will be completely MAT neutral. For MAT purposes, the
same will be ignored for computing future book depreciation, as well as
gains/losses on sale or final disposal of the fixed assets.
2. With respect to Subsidiary 2, there
is a fair value uplift of Rs. 15 million. The adjustment to retained earnings
is completely MAT neutral vis-à-vis existing provisions. For the purpose
of MAT, retained earnings adjustment of Rs. 15 million shall be included in the
book profit at the time of realisation of such investment.
3. With respect to Subsidiary 1,
there is a fair value uplift of Rs. 20 million. However, it is sold in the
comparative period. For the purpose of MAT, retained earnings adjustment of Rs.
20 million as well as fair value uplift of Rs. 2 million in the comparative
period are completely ignored, since the same has already been realised in the
comparative period, on which MAT was applied under Indian GAAP.
4. The fair value uplift on the
mutual fund of Rs. 5 million is to be included in the book profits for purposes
of determining MAT over the next five years. However, firstly this needs to be
trued up at 31st March ’16. The trued up uplift is Rs. 10 million. For the next five years, Rs. 10 million
would be equally spread, for determining book profits for MAT, in accordance
with the Table below.
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Previous year
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Assessment year
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Amount to be added to book profits
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Rs (million)
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2016-17
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2017-18
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2
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2017-18
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2018-19
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2
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2018-19
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2019-20
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2
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2019-20
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2020-21
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2
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2020-21
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2021-22
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2
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5. The upward fair
valuation in the mutual fund of Rs. 7 million for the year 16-17, will be
included in the Ind AS book profits and MAT profits as well. The downward fair
valuation of Rs. 3 million will be included as loss in the Ind AS book profits.
However, in accordance with the requirements of 115 JB, the same will be added
back to the Ind AS book profits, for purposes of calculating MAT book profits.
This results in a double whammy for companies.
