Anticipating that there will be no regular Budget before the General Elections, the UPA II government expects to dangle tax breaks to the public and companies in the forthcoming Winter Session of Parliament itself.

A top finance ministry official said the big change will be a lower corporate tax rate instead of the current maximum 33.99 per cent rate by doing away with all surcharges. It could also provide for a re-examination of all cess including that on education.

This will be done through the Direct Taxes Code (DTC) to be tabled in the Lok Sabha by finance minister P Chidambaram.

"The effective tax rate for companies should be as close as possible to the minimum alternate tax of 18.5 per cent of book profit which is what several big companies pay," the official said. "Else, the incentive to play around with exemptions will not go away," he said.

The changes will be effected from FY15 but the finance ministry estimates the positive effect of the announcements will create a favourable impact on Corporate India. It will be read as a clear indication of the direction the present Congress-led government would follow if it is re-elected.

Simultaneously, the DTC is unlikely to offer any tax breaks for contributions made by companies for spending 2 to 3 per cent of their profit towards corporate social responsibility(CSR).

The official said since the new Companies Act has not made spending on this head compulsory, there is no reason to offer any tax break now. It would instead wait for data on the CSR spends to accumulate for more than a year, before taking a call.

While some changes are also expected to be made in the personal income tax rates, the official said those are unlikely to be major at this stage.

Accounting Standards and the companies Act
Dalal of PwC points to the stringent provisions provided for related-party transactions. The earlier Act did not provide for any definition of related-party. But the new Act has provided for the widest possible definition of the related-party transactions, he said. Another issue bothering many tax experts while considering any related-party transactions is that the threshold of ownership is different between I-T Act and the companies Act. Transfer pricing regulations look at 20 per cent or more ownership of voting power, whereas the companies law looks at control of 20 per cent or more of total share capital (including preference share capital), say experts. Under the new Act, a company having one or more subsidiaries will also prepare Consolidated Financial Statement (CFS) of the company, and of all the subsidiaries in the same form and manner as that of its own. The draft rules issued by Ministry of Corporate Affairs (MCA) for this purpose states that the consolidation of financial statements of the company shall be done in accordance with the Accounting Standards. However, by the requirements of the existing Accounting Standards and the Indian Accounting Standards placed on MCA's website, there is no such requirement, which has been so prescribed. Therefore, there is an inconsistency between the two to that extent, point out experts.

Provisions relating to consolidated financial statements may also clash with the listing agreement. Under the new Act, companies need to prepare the consolidated statements using the applicable Accounting Standards. However, under the listing agreement, currently, the listed companies are given the choice of preparing the CFS either by Indian Accounting Standard or under IFRS (International Financial Reporting Standards). Experts point out this may lead to a situation where companies either prepare CFS additionally under IFRS on a voluntary basis, or decide not to prepare these at all.

As per the new Act, the maximum number of audit assignments undertaken by a chartered accountant cannot exceed 20. However, this Act, unlike the old Act, does not prescribe the types of companies and other assignments, which will be included or excluded for the purpose of calculating this limit. The vagueness will remain till the time MCA and ICAI clarify the combination, says audit experts.

Tax related implications
The new Act mandates spending for corporate social responsibility (CSR) by companies. However the Central Board of Direct Taxes (CBDT) is still examining the issue of giving tax breaks on CSR spending. Auditors point out that under Section 135 of the new Act, the CSR committee in a Board shall have at least one independent director. However, under Section 149(4) and the Rules framed thereunder, a private company is not required to have an independent director. This dichotomy needs further clarity from the ministry, say experts.

On restatement of financial statement, the reported profits of the company are likely to undergo a change, if the restatement relates to a profit and loss item. This could potentially impact the Minimum Alternate Tax (MAT) calculations of the company. However, the ability of the company to revise its MAT calculations could be restricted if the tax laws are not suitably amended to permit revision of returns for periods that match the periods for which financial statements can be revised, points out Sai Venkateshwaran, partner and head (accounting advisory services), KPMG India.