But these may have a negative one-time impact on corporate earnings this quarter.
By Jamil Khatri
On September 20, the government brought in the Taxation Laws (Amendment) Ordinance 2019 to make amendments to the Income-tax Act 1961 and the Finance (No. 2) Act 2019. The Ordinance provides tax concessions for domestic companies and new domestic manufacturing companies. It also provides an option for domestic companies to pay income tax at the concessional basic rate of 22% (to be increased by surcharge and cess), subject to conditions they will not avail exemptions/incentives. The Ordinance also allows new domestic manufacturing companies (incorporated on or after October 1, 2019, and would commence manufacturing on or before March 31, 2023) the option to pay income tax at the basic rate of 15% (plus surcharge and cess), subject to conditions. The two set of domestic companies availing concessional regime will not be subject to the provisions of MAT. The Ordinance reduces for all other companies the basic rate of MAT from 18% to 15%.
It provides that a company can exercise the option of using concessional rates along with filing of tax return. However, with respect to the option to be selected for FY ending March 31, 2020, the listed companies may need to assess this much sooner, as the selection of the relevant option will have to be considered for quarterly provisions—this may have significant impact on the September earnings.
Corporates that do decide to opt for concessional rates would need to give effect to the Ordinance while determining the amounts of tax expense for the September period. For these companies, the profit will have a current tax charge at a reduced rate. This will give a boost to their profits. But for many companies, an equally significant impact on earnings for September 30, 2019, will be due to remeasurement of the deferred tax assets/liabilities carried in the books, based on reduced rates. The remeasurement impact will need to be given effect in the current September 30 quarter results. In India, there are significant differences in the way profits are computed for the purposes of determining income tax liability and for computing profits as per accounting standards for statutory reporting. These differences have increased after adoption of Ind-AS, which are converged with IFRS. This has resulted in companies carrying large deferred tax balances in their books.
For example, under Ind-AS, real estate developers recognise revenue in the financials only when possession is given to the buyer, but profit for tax purposes is computed only when the asset is under construction on a pro rata basis—resulting in recognition of deferred tax assets. These assets will now be written down and an additional one-time tax charge will need to be recorded. Similarly, many companies have recognised assets for tax benefits relating to carry-forward tax losses, as they estimate offsetting these losses against future tax liability. The value of these benefits will reduce owing to tax cuts, requiring corporates to write down such assets. This will deal a considerable hit on their earnings. Conversely, companies with large deferred tax liability balances (for example, due to accelerated tax depreciation) will see a one-time credit to earnings.
Another aspect that needs careful consideration is the impact of the recent CBDT clarification on non-eligibility of past MAT credit and no set-off of losses arising from additional unabsorbed tax depreciation in the new lower tax regime. If companies elect to adopt the new lower tax regime and determine that MAT credit is not eligible, they may need to write down such accumulated credits.
Thus, companies need to carefully assess the impact of the tax cuts on their earnings for the quarter ending September 30, 2019, and prepare comparative tax workings under existing and new lower tax regimes, considering various factors especially the quantum and duration of existing tax incentives, benefits from MAT credit, categories of losses, expansion plans, etc. In some cases, the impact may be easy to calculate, whereas in others it could be more complex due to aforesaid variables. All in all, as corporates evaluate options to optimise tax liabilities, there could be a resultant adverse one-time impact on corporate earnings in the quarter ending September 30, 2019. We have seen a similar impact in the corporate results in countries such as the US where there have been tax cuts in the recent past. Whether it happens in India will need to be seen.
The author is partner, BSR & Co