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Companies may need to evaluate interplay between Ind AS and related tax consequences

As is the case with any regulatory reform, the adoption of Ind AS is likely to also result in teething problems for companies in the form of adverse tax consequences

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In recent times, India has witnessed several regulatory upgrades such as goods and services tax (GST) and the Real Estate Regulatory Act (Rera). Another radical change which has come to have significant ramifications on India Inc is the adoption of the Indian Accounting Standards (Ind AS).

Ind AS is an accounting framework to be followed by enterprises, and is born out of the need for convergence of the General Accepted Accounting Principles (Indian GAAP) and the International Financial Reporting Standards (IFRS). The Companies Act, 2013, mandated the migration from Indian GAAP to Ind AS for companies in a phased manner, and presently, Ind AS is applicable to all listed companies and unlisted companies with a net worth of more than Rs 250 crore, with certain exceptions.

In line with the principles of IFRS, the Ind AS framework provides an opportunity for enterprises to record assets at their fair value, thereby departing from the Indian GAAP's spirit of 'accounting at historical prices'. Thus, assets such as plant, property, equipment and investments may be recorded by enterprises at their respective fair values. As is the case with any regulatory reform, the adoption of Ind AS is likely to also result in teething problems for companies in the form of adverse tax consequences.

Consider a case of a company with several operating verticals. In case the company fair values its assets on adoption of Ind AS, the fair valuation will be credited to other comprehensive income in the statement of profit and loss. While the fair valuation of assets may result in presentation of a stronger balance-sheet, this may also entail tax outgo in the form of minimum alternate tax (MAT) in future on splitting of the verticals by way of a demerger.

MAT is a tax levied on the 'book profits' of companies after effecting prescribed additions and deletions. The Finance Act, 2017 provides that in case an asset which has been fair valued is retired, disposed, realised or otherwise transferred, the fair valuation attributable to such an asset shall be liable for MAT. A demerger results in transfer of a business undertaking from one company to another. Prima facie, a demerger may come within the ambit of 'retired, disposed, realised or otherwise disposed'. While there may be a case to argue that mergers should not fall in the category of retirement, disposal, realisation or transfer due to judicial precedents, demergers may not share the same fortune.

Another conundrum that adoption of Ind AS poses is the tax neutrality of certain demergers. As per the Ind AS framework, acquisition by a company of an undertaking by way of demerger is to be recorded at fair values, if the entity from whom the undertaking is acquired is not under 'common control'. On the other hand, the Income Tax Act (IT Act) specifically states that a demerger is considered tax neutral only if assets and liabilities are transferred at book values. Here lies the predicament - in case of demergers between entities not under common control, it is virtually impossible to meet the condition of tax neutrality, while accounting for the demerger under Ind AS.

The Central Board of Direct Taxes (CBDT) recently released a list of Frequently Asked Questions (FAQs) to address some of the issues arising on adoption of Ind AS by companies. However, the FAQs did not provide any clarity on the aforementioned issues.

The MAT-Ind AS Committee has also proposed changes to the IT Act which may have a bearing on corporate restructuring. For instance, securities premium recorded on issuance of shares pursuant to a merger or demerger scheme may be liable to MAT, if the proposals are effected in the IT Act.

Thus far, corporate restructuring exercises have enjoyed a tax-neutral treatment under the IT Act, upon satisfaction of prescribed conditions. However, adoption of Ind AS by companies may change the dynamics. Therefore, it is imperative for companies planning to implement corporate restructuring to evaluate the potential impact of Ind AS to plug any probable outgo of tax.

The writer is partner - tax, KPMG India
Nikhil Deshpande, manager, tax KPMG India contributed to the article

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