CBDT Committee recommends MAT framework for Ind-AS companies

This Tax Alert discusses framework recommended by a Committee set up by Central Board of Direct Taxes (CBDT), the apex administrative body of direct taxes in India, inter alia, for making amendments to the Indian Tax Laws (ITL) for the purpose of levy of “book profit” based Minimum Alternate Tax (MAT) on companies required to prepare financial statements as per framework of new Indian Accounting Standards (Ind-AS) which are converged form of International Financial Reporting Standards (IFRS).

With Ministry of Corporate Affairs (MCA) notifying roll out of Ind-AS in a phased manner from financial year commencing on or after 1 April 2016, the Committee (called Accounting Standards Committee) was directed on 8 June 2015 to suggest framework for MAT in view of transition to Ind-AS.

On review of provisions of the ITL and Companies Act, 2013 (CA 2013), the Committee noted that (a) that there was an implicit relationship between “distributable profit” (i.e. profit before tax available for appropriation and distribution as dividend) and tax base for levy of MAT under CA 2013; (b) dividend may be allowed to be paid from past realised profits or from current year’s profits even if unrealized.

Accordingly, the Committee approached MCA for clarifications of scope of “free reserves” and determination of “distributable profit” under CA 2013 in Ind-AS regime since fair valuation is pervasive under Ind-AS. MCA clarified that “distributable profit” for the purposes of determining ceiling on managerial remuneration and dividend distribution under Ind-AS regime will exclude items included in Other Comprehensive Income (OCI) section of income statement under Ind-AS. Based thereon, the Committee has suggested a three-pronged approach for levy of MAT on the basis of “book profit” as per Ind-AS income statement.

The three-pronged approach may be summarized as follows:

1. Ind-AS requires a combined statement of Profit & Loss (P&L) and OCI. Since OCI largely comprises fair valuation differences, MAT pick up should be from the P&L and not from Total Comprehensive Income (which represents aggregate of P&L and OCI). The profit as per P&L can be subjected to upward and downward adjustments which already exist in current MAT provisions.
2. Although, MAT pick up should be from P&L, items included in OCI should also be picked up for MAT levy at an appropriate point of time. Illustratively, revaluation surplus/gain can be picked for MAT at the time of realization /disposal/retirement of the asset or investment.
3. On first time adoption of Ind-AS, items which are directly transferred to Retained Earnings and are not reclassified to P&L in future should be picked up for MAT in the first year of Ind-AS adoption.

Continuing with its recent trend of consultative approach, the CBDT has published Committee’s Report and sought issues/points requiring further clarifications/guidance from stakeholders and general public by 10 May 2016.