Companies exercising the LCTR option will have to decide whether to allow remeasurement in the September quarter financial statement or spread the effect.
By Prashant Khatore
Recently, the direct tax landscape has been altered with the domestic companies now having an option to avail the lower corporate tax rates (LCTR) of 22% and 15%, subject to satisfaction of prescribed conditions. Further, such companies will not be liable to tax under Minimum Alternate Tax (MAT) provisions. However, companies that opt for LCTR will not be able to claim the benefits of certain deductions.
Post the announcement, there was a considerable debate on the issue of brought forward MAT credit and brought forward loss on account of additional depreciation for companies deciding to avail the benefit of LCTR of 22%.
CBDT vide circular dated October 2, 2019 clarified that the benefit of brought forward MAT credit and brought forward loss on account of additional depreciation will not be available to a domestic company opting for LCTR.
On availability of brought forward MAT credit primarily there were two views. As per one view, no MAT credit could be claimed as computation mechanism of credit fails because of non-applicability of MAT provisions. However, an alternate view was that the entire amount can be set off to the extent of normal income tax liability. It seems that CBDT has decided that brought forward credit will not be available.
As the binding nature of CBDT clarifications is debatable, it is advisable for the government to amend the law to lay down the position clearly, as a different interpretation may lead to litigation.
On the issue of brought forward additional depreciation the ambiguity was arising on account of the language used in the ordinance, as in judicial precedents the words “loss” and “depreciation” are considered different. However, it is clearly spelt out that benefit will not be allowed for brought forward “additional depreciation”.
Hence, opting for concessional tax rate may not be a plain-vanilla choice, and would rather be based on the comparison of the benefit foregone vis-à-vis tax outflow.
Companies can, however, exercise the option of LCTR after the set-off of such depreciation and MAT credit.
Moreover, as the provisions are introduced via an ordinance there is a possibility of further amendments at later stage.
If a company decides to adopt LCTR, it will have consequential implications on profit after tax and earnings per share (EPS).
Changes in the tax rates will require companies to re-measure their existing deferred tax assets and liabilities resulting in impact in profit and loss account. However, if these relates to items of other comprehensive income (OCI) or equity, the corresponding effect will also be accounted for in OCI or equity. For companies which had not recognised DTA/DTL on temporary differences which reverses in tax holiday period will need to recognise new DTA/DTL as tax holiday exemption will no longer be available to companies opting for LCTR.
MAT credit is recognised as DTA subject to convincing evidence that such asset be realised. If company opts for LCTR, MAT credit will no longer be available and will not meet the definition of an asset. Hence companies which opts for LCTR, DTA recognised for MAT credit will need to be derecognised. Such reversal will be charged to the P&L account.
Companies exercising the LCTR option will have to decide whether to give effect of remeasurement of tax assets and liabilities in the September quarter financial statement or spread the effect over the remaining quarters if company exercises the option in the current financial year. Companies which are in process of evaluation of whether to opt for LCTR should ideally wait for taking effect of such remeasurement till they have firmed up their decision on a prudent basis.
In light of the above, it is evident that decision to opt for LCTR should not be governed by a sole/single factor. Hence, it is imperative for companies to evaluate the feasibility of opting LCTR from taxation and accounting perspective, before exercising its option.
(The author is Tax Partner, Indian member firm of EY Global. Views are personal)