The finance ministry is set to issue a guidance note on what accounting standard should be used by firms to determine...
The finance ministry is set to issue a guidance note on what accounting standard should be used by firms to determine whether they are liable to pay 18.5% minimum alternate tax (MAT) on their book profits or not.
The guidance note will apply in the case of firms that make too much use of tax breaks granted under the Income Tax Act and are therefore potential candidates for charging MAT on book profits, instead of the 30% corporate tax rate on a significantly lower base of taxable income computed under the Income Tax Act. Companies that do not make much use of tax breaks are anyway required to pay 30% corporate tax on taxable income computed under the new Income Computation and Disclosure Standards (ICDS) that the tax department has enforced from this fiscal onwards.
The confusion on what accounting standard has to be used for determining MAT applicability has cropped up because three different accounting standards prescribed under two laws —Companies Act and the Income Tax Act — will now co-exist.
The Companies Act mandates that financial accounts (and book profit) have to be prepared as per notified generally accepted accounting principles (GAAP) but as part of its programme to converge GAAP with international financial reporting standards, has also notified a new set of standards, Ind AS, that would apply to all companies with more than R500 crore net worth and their arms from 2016 onwards. ICDS notified under the I-T Act is the third accounting norm that has been made applicable from 2015 for determining taxable profits.
ICDS will ensure that similarly placed companies that follow GAAP or Ind AS for preparing their books of account (for investors and shareholders) and are also not benefiting too much from tax breaks, will be subject to the same accounting rules for income tax purposes. However, it is not clear what standard would apply for determining whether MAT is applicable for those availing tax breaks excessively. Choice of accounting rules becomes crucial in determining MAT liability as 18.5% of book profits acts as a benchmark to decide whether tax breaks under I-T Act have been availed excessively or not. If corporate tax burden computed under I-T Act falls below this benchmark, then 18.5% MAT would be charged on book profit.