21.1 Minimum Alternate Tax (MAT) is payable by companies and Alternate Minimum Tax (AMT) is payable persons other than companies. Tax payable under ITA is higher of the following:
i) Tax under Normal provisions of the ITA; or
ii) Tax as per MAT/AMT provisions.
In a case where tax payable is as per MAT/AMT provisions, then the excess MAT/AMT paid over tax as per normal provisions, is available as credit in subsequent years. In subsequent years, if tax payable under normal provisions is higher than MAT/AMT, the excess MAT / AMT of earlier years can be set off against normal tax. (Please refer to our budget note for 2012 for a detailed example.)
21.2 As per the current provisions, MAT/AMT credit can be carried forward up to 10 years. Finance Bill provides for increasing this time limit to 15 years.
22.1 Section 115JB provides for levy of MAT on book profits. Book Profits refers to profit disclosed in Statement of Profit and Loss Account prepared in accordance with the provisions of Companies Act, 2013. Companies to whom Ind-AS apply are required to bifurcate their Statement of Profit and Loss into 2 parts (Ind-AS – 1 Presentation of Financial Statements):
(i) Net profit for the year; and
(ii) Net Other Comprehensive Income (OCI)
Ind-AS promotes the concept of Fair Value Accounting. This means that all the assets and liabilities shall be valued at fair value. The present accounting system followed by companies is based on historical cost i.e., assets are valued at cost. This would require restatement of assets.
OCI includes financial impact arising from reinstatement of underlying assets in accordance with the principle of Fair Value Accounting. This results into “appreciation” or “depreciation” in the value of assets (i.e., unrealised or notional gain/loss) which needs to be accounted. Due to the concept of OCIs profits arise at two different stages– i) Profit before tax and before OCI adjustment and ii) Profit before tax but after OCI adjustment.
22.2 A concern was raised that whether OCI should be included for computing the book profits? CBDT had constituted a committee to address this concern. In consultation with Ministry of Corporate Affairs (MCA) the committee made consultations for addressing this issue. The recommendations of the committee were accepted and amendments were made for computation of book profits in different cases.
22.3 Briefly, the amendments provide that book profit for MAT purposes would include the appreciation/depreciation as per OCI. However, there are certain exceptions for items which would have an impact only on their realisation or disposal.
Further, in the first year of adoption of Ind-AS, companies would be required to adjust the opening book value of assets and liabilities. This would result in a huge adjustment to be made through OCI which would also impact the MAT computation. To defray the huge increase in MAT, it has been provided that the transition adjustments as on the first day of the reporting under Ind-AS must be considered equally over 5 years from the first year.
22.4 It is advisable that companies which have to adopt Ind-AS should take proper advice on applicability and impact of MAT on their tax liability.
23.1 Real estate projects happen in various manners. One of the usual manner is where Land owner and Builder / Developer come together to develop real estate property. Typically it is referred to as Joint Development Agreement (JDA). In a JDA, the owner of immovable property (land or building or both) provides “Development Rights” (DRs) to the developer. For these DRs, the owner is paid consideration by way of cash or share in the new immovable property or a combination.
The property is not transferred / sold. Ownership remains with the owner. The Developer develops new property on the existing property. Ownership of existing property may be transferred when the new property is developed.
Under the current provisions, capital gains tax is triggered in the hands of land owner at the time when the possession of existing property is handed over for development. This creates difficulty for the owner of the property as consideration would not have been realised when possession is given. Consideration will be received when the new property is ultimately sold.
23.2 Therefore, in order to minimise the hardships faced by owner of immovable property, Finance Bill provides for the following:
23.2.1 Capital gains earned by the owner in a JDA will be taxed only in the year in which Certificate of Completion for the project (i.e. new property) is issued by the competent authority. It is clarified that even if completion certificate is issued for part of the project, it will be sufficient to trigger the tax.
In this situation also, the owner would not receive cash. But then he will have to generate cash by selling the new property.
23.2.2 Sale consideration will be taken as the stamp duty value of owner’s share in the project on the date of Certificate of Completion. Any monetary consideration received on transfer will also be included in sale consideration.
23.2.3 If however the owner transfers his share in the project on or before the date of issue of Certificate of Completion, Capital gains will be taxed in the year of transfer of the project. This could trigger even in transfer of a part of the project.
23.3 The owner will acquire share in the new property against the old property. The new property is the consideration for old property. Cost of share in the new property will be the sales consideration considered for transfer of old property (see para 23.2.2).
23.4 TDS – If the property owner receives any monetary consideration under the JDA, the payer will have to deduct tax at source @ 10%. There is no TDS on paying consideration by way of share in the new property.
23.5 This section is applicable to individuals and HUFs only. Thus for other persons, existing provisions continue to apply, i.e., in case of other persons, capital gain tax is payable when the land is handed over for development to the builder.
23.6 There can be some technical difficulties. A person can hold property as “Capital asset” or “Stock in trade”. Sale of capital asset gives rise to Capital gain / loss. Tax rate is lower for Capital gain. But if the person holds the property as stock in trade, sale generates business income / loss. Tax rate is higher.
If the land owner enters into a JDA, it means he is converting the Capital asset (immovable property) into Stock in trade. When a person enters into a JDA, it means he is going to undertake business with his immovable property. This conversion happens just before he hands over the possession.
If the property is stock in trade, then whether this relief will be available or not, is debatable.
24.1 Under ITA, if any person is undertaking business in SEZ, profits related to exports of the SEZ undertaking are exempt from payment of Income-tax. The relief applies to the income of the “unit” in the SEZ.
24.2 In many cases, companies have units in SEZ as well as in areas outside SEZ (Non-SEZ units). Tax payer is one. Business units are two or more. Relief for profit of SEZ unit is available as per the provisions of S. 10AA. Losses if any of other units are carried forward.
24.2.1 The issue is – Can the loss be carried forward without setting it off against the income of SEZ unit? This results in higher losses being carried forward and being set off against taxable income of subsequent years.
24.2.2 The tax department is of the view that exemption is available only after setting off of losses of non-SEZ units. A circular (No. 7 of 2013) was also issued stating the view of tax authorities. The courts have taken a view in favour of assessee providing exemption for entire income of the SEZ unit, i.e., the losses of Non-SEZ can be carried forward.
24.3 Finance Bill provides to clarify that deduction for profits of SEZ units will be provided only on the net income after setting off of losses and not for the entire income of individual SEZ unit.
Refer to Example 4.
An Indian company has total 3 units – Unit 1 in SEZ and Units 2 and 3 outside SEZ (non-SEZ units). The profits/(losses) of SEZ undertaking is Rs. 250 and of non-SEZ units are (Rs. 450) and Rs. 300.
An evaluation of taxable income in the scenario before clarification and after clarification is explained below.
Scenario I – Before Finance Bill 2017
Unit 1 – SEZ
Less: Deduction u/s 10AA
Unit 2 – Non-SEZ
Unit 3 – Non-SEZ
Total taxable income (1+2+3+4)
Losses to be carried forward
Scenario II – After Finance Bill 2017
Unit 1 – SEZ
Unit 2 – Non-SEZ
Unit 3 – Non-SEZ
Less: Deduction u/s 10AA - restricted to
Total taxable income (1+2+3+4)
Losses to be carried forward
This will result in higher tax burden for the tax payer in future years.
25.1 Domestic Transfer Pricing provisions were introduced by Finance Act, 2012 based on the decision of Supreme Court in the case of Glaxo Smithkline Asia (P.) Ltd. Briefly, the Honourable Supreme Court in this decision had addressed a larger issue of whether Transfer Pricing provisions should be extended to domestic transactions. It mentioned that shifting of profits in such transactions, being domestic, would ordinarily be tax neutral. However, this would not be the case where one of the companies is making a loss (resulting in tax arbitrage); or if different tax rates are applicable to the assesses concerned. The Honourable Supreme Court had recommended empowering the assessing officer to apply any of the generally accepted methods to determine the Arm’s Length Price (ALP) in respect of such transactions. Further, it recommended maintenance of books of accounts and documents in such cases; as also obtaining of an audit report from a Chartered Accountant.
25.2 The transfer pricing provisions apply to specified domestic transactions. The specified domestic transactions are:
- Payments to related parties u/s. 40A(2)(b), and
- Where one party enjoys any kind of profit linked
Eg: deduction under S. 80IA.
The transfer pricing provisions apply only if aggregate transaction value exceeds Rs. 20 Crores.
25.3 These provisions increased the compliance cost in case of small businesses and burden of the tax payers considerably. Further it caused difficulties in case of transactions like managerial remuneration. It was difficult to find comparable transactions.
In order to reduce the compliance burden the Finance Bill proposes to exclude the payments made to related parties from the meaning of specified domestic transaction. [S. 92BA] Transactions where one party enjoys a tax holiday or deduction/exemption, still continue to be covered by the Domestic Transfer Pricing provisions.
This is a beneficial provision and reduces the compliance burden to a large extent where tax arbitrage was anyways to a minimal extent.
Every person carrying business or profession (other than specified professional) are required to maintain books of accounts if turnover or income exceeds the limits specified in the Act. In order to reduce the compliance burden, these limits have now been increased for Individuals and HUFs. The proposed changes are summarised in the table below:
For turnover/sales/gross receipts
The Finance Act, 2016 had increased the limit of
turnover for businessmen opting for presumptive
taxation scheme from Rs. 1 crore to
Rs. 2 crore. However, corresponding amendment was not made in the limit for audit of books of accounts (S. 44AB). This issue was mentioned in our Budget note for 2016 in para 19.2.4. It was clarified vide CBDT press release dated 20th June, 2016.
Now an eligible person opting for presumptive taxation scheme as per S. 44AD(1) shall not be required to get his accounts audited if the total turnover or gross receipts of does not exceed Rs. 2 crore.