Indian Accounting Standards (Ind AS) is going to impact not only how companies will account and record transactions in their books of accounts going forward, but one of the more significant consequences of this change will be on the reported amount of taxes in the financial statements of corporate India. Besides changes to the accounting and reporting of income taxes, it is also expected that the amount and timing of tax cash flows will significantly change especially due to the provisions of MAT. Some of these implications are discussed below.

Impact on MAT

Calculation of MAT is based on accounting income after making certain adjustments. Companies that will adopt Ind AS and which are covered under MAT, including those planning for early adoption will use Ind AS income as the starting point for computing MAT liability. In many cases this can significantly increase the MAT liability and resulting tax payments due mainly to increased use of fair value accounting under Ind AS. Under fair value accounting, unrealized gains will get recognized for various items which is presently not done under Indian GAAP.

For example investments in equity investments which under Indian GAAP are recorded at the lower of cost of fair value will now be recorded at fair value under Ind AS. This could result in many entities having to report unrealized gains on their equity investments due to their currently appreciated fair value. Itis equally true for investments in unlisted or unquoted equity securities. When these unrealized gains are recorded in the income statement, it will consequentially increase the MAT liability. Another classic example would be derivatives. Presently, under Indian GAAP, mark to mark losses are to be recognized on derivative contracts whereas gains are ignored unless they are covered under AS -11 relating to foreign exchange transactions. Going forward under Ind AS all types of derivative instruments such as commodity, interest rate swaps, put and call options relates to equity shares, foreign exchange contracts will need to be recorded at fair value as an asset or as a liability. Accordingly, when such derivatives are in an asset position the resultant unrealized gains will get accounted in the income statement. This again can impact the MAT liability. These are only few examples of how fair value accounting can have a significant impact on MAT and cash outflows on adoption of Ind AS.

Another implication arises from change in the accounting for actuarial gains and losses on defined benefit plans such as gratuity and compensated absences. Under Indian GAAP these actuarial differences comprising changes in assumptions such as discount rate, salary increments, return on plan assets etc. are charged to the income statement. Going forward upon adoption of Ind AS, these actuarial differences will get directly recognized in equity as part of other comprehensive income and will never get recycled back to the income statement. Accordingly, if the company has actuarial losses those will get adjusted inequity as part of OCI and not income statement, thereby again increasing the accounting income and therefore the MAT liability.

In order to resolve these issues, it may be helpful for the tax authorities to provide specific adjustments to be made to provisions of MAT under tax laws taking into account various accounting implications of Ind AS. In order to do so it will also be important for all stakeholders to understand the details and nuances of the 39 Ind Ass presently issued. Also, if companies effectively plan Ind AS adoption on a timely basis including making suitable policy choices available under Ind AS, then some of the above implications of Ind AS may get resolved thereby bringing the MAT situation back to that currently under Indian GAAP. For example fair value gains/losses on equity investments can either be recorded in the income statement or in equity as part of other comprehensive income (OCI) depending on the accounting policy choice available under Ind AS. Similarly, for certain derivative instruments such as foreign currency contracts and interest rate swaps if the company decides to apply hedge accounting to mitigate the underlying economic risk, then certain mark to market gains can again be recognized in equity as part of OCI until when the underlying transaction occurs at which point such gains/losses will get transferred to the income statement. This will of course also depend on how the tax authorities view the concept of OCI which will be completely novel for corporate India. This two-step performance measure of a Company's operations will need to be properly understood in the context of tax calculations, thereby requiring some level of learning and trainings.

Dividend distribution tax

Another area which will increase the reported tax expense and EPS of corporate India is dividend distribution tax (DDT). Under Ind AS, consolidated financial statements (CFS) of certain corporates could see reporting of higher consolidated tax expense. To illustrate this - when a subsidiary distributes dividend to its Parent company, there is incidence of DDT. Though the dividend transaction is eliminated in the CFS, DDT is generally recorded as a deduction from consolidated reserves under current Indian GAAP. Going forward under the Ind AS regime, such DDT will be recorded as part of consolidated tax expense in the income statement. It does not stop here, Parent companies will also have to evaluate whether additional deferred tax liability for such DDT is to be recorded for future repatriations of subsidiary/associate's accumulated profits. Ind AS also requires detailed disclosures in this area.

Income computation and disclosure standards

The discussion on taxes will be incomplete without mentioning Income Computation and Disclosure Standards (ICDS) recently issued by the CBDT. These tax standards now prescribe new rules to determine taxable income. The tax standards have been introduced to facilitate implementation of Ind AS, in response to concerns previously expressed by stake holders. These tax standards are already effectivefor the current year ending March 31, 2016 tax computations - in fact for the June 2015 advance tax calculations. Some of these standards could increase tax outflows resulting from advancement of income or delay of expense deduction for tax purposes such as the use of percentage of completion method for service and construction contracts, non-deduction of expected losses on onerous contracts and mark to market losses on derivative contracts, elimination of the concept of capital grants (i.e. all grants will effectively get taxed), lower threshold for recognition of contingent assets etc. So independent of Ind AS implementation, corporate India will have to plan for this significant change.

Next steps

Accordingly, with this plethora of changes emanating from both Ind AS and ICDS, companies should carefully evaluate the accounting implications of Ind AS and more importantly its tax consequence andplan ahead their tax strategies.