Ind-AS to Raise June Qtr Tax Liabilities by 20%

Fair value accounting of financial instruments under new standards may lead to higher MAT levy; Cos in tech, manufacturing, IT, pharma and infra could be hit harder

Indian companies that have moved to the new accounting standards for the June quarter could be staring at an increased tax liability of about 20% under minimum alternate tax, or MAT.

Due to the way accounting is done under the new standards, Ind-AS, many transactions involving foreign exchange, securities and equity apart from certain demergers could start attracting MAT, industry trackers said.

India has changed its accounting standards from GAAP to Ind-AS, which is on a par with International Financial Reporting Standards (IFRS), from April 1 this year. All companies with a total net worth of 500 crore or above are now following . 500 crore or above are now following ` Ind-AS. So while the financials of companies remain the same, the way they are calculated is now different, impacting the firms' profits, goodwill, net worth, and, in some cases, even market capitalisation.

The core of the problem is fair value accounting. Under the old accounting standards, companies would take into account cost price of certain assets including foreign exchange, securities, debentures or shares they hold. However, Ind-AS requires that the companies record the fair value or the market value of these financial instruments. If the valuation of these instruments increases--which is expected in most cases--this would boost the book profit, and hence MAT could be imposed on that, say analysts.

“As the law stands today, companies that carry assets or liabilities, such financial instruments including shares, derivatives or other investments, could see changes in fair values of these instruments being routed through the P&L, which in turn may trigger a MAT impact in the June quarter,“ said Sai Venkateshwaran, partner and head of accounting advisory services at KPMG in India. “For instance, sectors where companies have large foreign currency exposure typically have contracts that need to be fair valued, and will see an impact,“ he said.

Sandip Khetan, Partner at S R Batliboi, a member firm of EY Global, said, “For many companies the MAT liability would increase in the current financial year due to the fair value accounting changes mainly around investments in equity and other securities. Additionally, companies will be required to record several items of notional gains which could potentially result into increase in book profits and a resultant MAT outflow.“

This would also mean that interest free loans which one group company offers to another could be treated as a gain (although notional), and it could be accounted for and come under the purview of taxation.

Industry trackers expect the Central Board of Direct Taxes (CBDT) to clarify how the tax department would apply MAT on these transactions in the coming month.

A tax official in Mumbai said, “We are looking at how this (Ind-AS) could affect taxation.“ The official refused to clarify if this could impact MAT levy on the companies in the future.

Industry trackers said companies in tech, manufacturing, ITITES, pharmaceuticals, real estate and infrastructure could be most impacted.

Some of these companies are also putting aside funds for taxation. While the tax demands for the year could only be made much later, companies are preparing themselves for a tax contingency and litigation in the worst case scenario.

“We have already done an impact analysis of Ind-AS and MAT is one of the biggest worries,“ said CFO of a listed automobile company. “However, there is nothing much that we see could be done at this point in time, but we hope that there is some clarification from the government around this,“ the person said.

Industry trackers said even demergers could attract taxation under the new accounting standards. Hence, many companies are putting their demerger plans on hold till there is clarity about the regulations. “While demergers were considered a tax neutral activity till now, these will be seen as a form of distribution to shareholders and recognised at fair values under the new accounting standards, which may result in a gain recognition in the P&L which triggers taxation under MAT,“ said Venkateshwaran of KPMG.

The Economics Times,13th April 2016