The Central Board of Direct Taxes (CBDT) issued a press release on 5 August 2016, announcing certain modified recommendations/suggestions on select matters submitted by the Minimum Alternate Tax (MAT) – Indian Accounting Standards (Ind AS) Committee (the Committee) in its report dated 23 July 2016 (the report).
On 18 March 2016, the Committee issued a report proposing a framework for computation of book profits for Ind AS compliant companies (the Framework) for the computation of book profit for the purpose of levy of MAT under Section 115JB of the Income Tax Act, 1961 (the IT Act).
In this report (issued on 18 March 2016) the Committee had made the following key recommendations:
Overview of the recommendations in the report (issued on 5 August 2016)
The Committee received several responses from stakeholders, specifically on its recommendations relating to first-time adoption of Ind AS. These were examined and the recommendations of the Committee on the issues raised are as follows.
Property, plant and equipment – adjustments to retained earnings
Requirements of Ind AS 101, First-Time Adoption of Ind AS
Ind AS 101 permits an entity to measure items of Property, Plant and Equipment (PPE) at the date of transition at their recomputed values, measured in accordance with Ind AS 16, Property, Plant and Equipment, from inception. Alternatively, a first-time adopter of Ind AS can opt to apply the ‘deemed cost’ exemption and measure items of PPE either at their fair value or at carrying value as per the previous GAAP, on the date of transition. At the date of transition the resulting adjustments in the carrying value of existing PPE are recorded in retained earnings.
The initial recommendation of the Committee (in the report issued on 18 March 2016) was to include the amount of this adjustment in the book profit of the year of first-time adoption of Ind AS, since these amounts would never be reclassified to the statement of profit and loss. However, based on responses received from stakeholders, the Committee has now recommended the following:
The Committee has also stated that the same principle be applied to items of intangible assets on the date of transition to Ind AS.
Leases – straight-lining of lease rentals
Requirements of AS 19, Leases and Ind AS 17, Leases
Under Indian GAAP, AS 19 requires straight-lining of operating lease rentals even if payments to the lessor are structured to increase in line with expected general inflation. A corresponding lease equalisation liability/asset is recognised under AS 19. However, Ind AS 17 states that operating lease payments shall not be recognised on a straight-line basis in this scenario. Accordingly, any existing lease equalisation liability/asset shall be adjusted to retained earnings on the date of transition.
After consideration of several options, the Committee has recommended that this retained earnings adjustment should be included in the book profits for levy of MAT, over a period of three years starting from the year of first-time adoption of Ind AS, i.e., over three financial years.
Companies should include the applicable portion of the retained earnings adjustment relating to first-time adoption of Ind AS when computing their book profits for MAT purposes in these three years.
Investments – fair value adjustments through profit and loss account
Requirements of Ind AS 109, Financial Instruments
Ind AS 109 requires or permits measurement of certain financial assets or financial liabilities at fair value through profit or loss in specific circumstances. Examples include:
Adjustments arising from recognition of such items at fair value on the date of transition to Ind AS are recognised in retained earnings.
On examining several options and considering the dual aspects of taxation of unrealised gains/losses and maintenance of records, the Committee has recommended that the retained earnings adjustment should be included in book profit over a period of three years starting from the year of first-time adoption of Ind AS.
Other issues - recommendation
The Committee also considered issues relating to all other adjustments relating to first-time adoption of Ind AS recorded in retained earnings, which would never subsequently be reclassified to the statement of profit and loss. It
recommended that these should be included in the book profit over a period of three years starting from the year of first time adoption of Ind AS.
It appears that the concerns of the stakeholders have been positively considered by the committee. There seems to be an attempt to simplify the MAT implications rather than providing a complex formula which could create permanent differences and reconciliations of first-time adoption matters.
The general principles outlined in the earlier report (issued on 18 March 2016) have not been changed. The recommendations introduce certain exceptions to the general principles outlined in the report (issued on 18 March 2016) with regard to property, plant and equipment and intangible assets. Additionally, for all other adjustments on the date of transition to Ind AS that are recorded in the retained earnings (which would never subsequently be reclassified to the statement of profit and loss), the committee has proposed the impact of such adjustments be spread over three years while computing book profit for the purposes of MAT calculations.
However, some concerns remain as follows:
The Committee is continuing to examine other issues raised by stakeholders and evaluate various alternative approaches to the issues discussed above. Accordingly, the CBDT has invited suggestions and comments from stakeholders and members of the public on the recommendations discussed above by 20 August 2016.
To access the text of the CBDT press release, please click here.
© 2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.