MUMBAI: Minimum alternate tax, or MAT, a levy on book profit of companies that avail of exemptions and concessions, is now back to haunt companies – both Indian and multinationals operating in the country.
Companies that had announced a dividend or restructured debt in the previous financial year will face this liability in the current financial year. This is because, under IndAS, the new Indian accounting standard, both dividend and debt restructuring could increase the book profit of companies and would attract MAT.
Of the BSE 500 companies, 422 had announced dividend last year, according to the ET Intelligence Group. Many companies, including almost all the BSE 100 companies, are already provisioning for the MAT liability. Listed ones will be compelled to disclose this tax liability in their consolidated financial results in the coming months.
“Many companies that are covered by IndAS are preparing for the potential MAT liability consequent upon the changes brought in by the Finance Act 2017 in the relevant provisions under the Income Tax Act,” said Riaz Thingna, a director at Grant Thornton Advisory Private Ltd. in Mumbai.
“There may be a major impact on some companies in the specific accounting treatment of issues like a reversal of provisions for dividends in the financial statements and also in cases of corporate debt restructuring.”
India changed its accounting standards from GAAP to IndAS, which is on par with International Financial Reporting Standards, from April 2016. All companies will report their consolidated financial results as per IndAS in the coming months for the first time. Industry experts said if the tax demands are made, it could trigger a legal standoff between Indian companies and the government.
“The impact may run into crores in tax demands and could also lead to a lot of litigation,” said Thingna. While the government has clarified the applicability of MAT under IndAS in the budget, it fell short of explaining the impact on companies that paid a dividend or those that restructured debt.
Experts said that since proposed dividend is accounted for under IndAS in the year it is approved by shareholders rather than in the year to which it relates, as was the practice earlier, companies have recorded a reversal of the proposed dividend liability on the transition to IndAS. This has resulted in a temporary increase in the net worth of these companies.
“While this was meant to be a timing difference for recognition of the dividend liability, this may now have some impact on the MAT computations of companies,” said Sai Venkateshwaran, head – accounting advisory services at KPMG in India.
“Possibly one of the unintended fallouts of the recent amendments to the MAT provisions for companies using IndAS, this reversal of dividend liability may be added to the book profit for computing MAT liability over a period of five years.”
Even for companies with debt restructured in the previous financial year, MAT liability would arise. The amount by which debt is reduced after restructuring would be treated as income, increasing a company’s book profit.