Tax Impact of New Companies Act, 2013 on corporate.

With the introduction of New Companies Act, 2013, effective from April 1, 2014, it is also very important to understand that how it can effect the company taxation.  A few instances were given below which are important to corporate taxation in India.  

Depreciation

Accelerated provision

The MAT levy computes book profits based on the depreciation provided by the Corporates in the books. Currently, Schedule XIV of the 1956 Act requires provision of depreciation based on a specified percentage, under the SLM or WDV method. The 2013 Act has proposed to replace the said methodology by providing the“estimated useful life” for various categories of assets over which the same would have to be depreciated / amortised in the books in a systematic manner. Further, the specified useful life of assets varies across industries (manufacturing, mining, telecom, etc.). Generally, based on the current rates under the 1956 Act and the life estimates under the new 2013 Act, there is an overall acceleration of depreciation amount to be provided by the Corporates. For instance, in case of Office Equipments, the 1956 Act provides for 4.75% depreciation on SLM basis, whereas under the 2013 Act, based on an estimated useful life of 5 years (and 5% residual value), the depreciation rate works out to 19% on a SLM basis. Further, the rates of depreciation may also vary across different class of companies as may be prescribed, which would impact the book profit calculations. 

Revaluation Impact

Part A to Schedule II of the Companies Act, 2013 defines depreciable amount of an asset to mean the cost of the asset or other amount substituted for cost (i.e. any revalued amount). Thus, on a revaluation of assets, the depreciation would be provided on the full restated value of the asset. Typically, even currently, Corporates provide for the full depreciation on the revalued book value of the asset and the additional depreciation corresponding to the revaluation increase is credited to the Profit and Loss Account from the Revaluation Reserve. This treatment is also supported by ICAI Guidance Note on Treatment of Reserve created on Revaluation of Fixed Assets.

Incidentally, however, while approving the above treatment, the said Guidance Note (at Para 9) provides that in the ordinary course, while the depreciation should be provided on the full restated value, “for certain statutory purposes eg. dividends, managerial remuneration, etc., only depreciation relatable to the historical cost of the fixed assets is to be provided out of the current profits of the Company.” In such circumstances, an amount equivalent to the additional depreciation can be transferred from the Revaluation Reserve to the Profit and Loss Account.    The statutory provisions relating to declaration of dividend (and provision of depreciation therefor) are incorporated in Section 123 of the 2013 Act which does not seems to make any reference to the depreciation on the historical cost [as the corresponding Section 205(2) of the 1956 Act]. The new Section 123 only refers to Schedule II, which, as stated above, provides for depreciation on the full restated value. In such a case, it needs to be seen as to whether the principle in the ICAI Guidance Note can continue to be applied in the case of revaluation of assets (logically, it should). If the same do not continue to apply, then the company would have to provide for full depreciation out of the current year’s profits and not through the transfer from Revaluation Reserve, which may impact its book profits. In such a case, it would have to be evaluated whether, for MAT purposes as well, the additional depreciation should be allowed as a deduction [which is not the case, currently, in terms of clause (iia) of Explanation 1 to Section 115JB of Income-tax Act, 1961]. In either case, the provisions call for a rationalisation to be brought in line to avoid a double whammy.

Expenditure towards Corporate Social Responsibility (‘CSR’)

Companies with turnover of at least Rs. 1,000 crores or net worth of Rs. 500 crores or more  or net profit more than 5 Crore are required under the 2013 Act to contribute 2% of the Average Net Profits towards CSR projects.  Same is not allowable under normal tax computation u/s 37(1) but allowable under MAT. Further, if CSR related to any activity covered u/s 30-36, then also allowed. In this respect, one could look into the scope of section 35. Further deduction u/s 80G is also allowed.

Impact on Foreign Companies

The applicability of MAT to foreign companies is a vexed issue and judicial authorities have given contrary views on this aspect based on specific facts of each case. It is interesting to note that in some of the judicial precedents, it has been observed that foreign companies, not having any physical presence by way of a Permanent Establishment (‘PE’) in India, are not required to maintain books of accounts in India and thus, in such scenario, foreign companies are not required to pay tax under MAT provisions. On the other hand, the AAR, in certain cases , have held that a foreign company which has its presence in India and is required to prepare its books of accounts under the 1956 Act, will be subject to MAT levy.

Now, one of the key changes in the 2013 Act is regarding the change in the definition of ‘foreign company’. The definition of ‘foreign company’ has been widened to include a foreign company having any place of business in India including through an agent or through electronic mode. Thus, unlike the 1956 Act, the 2013 Act widens the scope of foreign company to cover not only entities which have physical presence in India but also entities having an agent in India or selling the goods / services in India through electronic (or any other?) mode. Such foreign companies would, therefore, be required to prepare the books of accounts in India in accordance with Schedule III (as applicable to any other Indian company) or near thereto. Based on the current version of the draft rules, such accounts need to be audited as well.

In light of this, there is a possibility that foreign companies doing business in India without any physical presence i.e.  merely through an electronic mode or through an agent, could also be subjected to MAT levy based on the rulings discussed above. The question then arises as to whether such foreign companies claiming Treaty benefits would be exempted from MAT, especially, since Section 115JB contains a non-obstante clause.

Others

Under the 1956 Act, Corporates are permitted to utilise balance in the Securities Premium Account to provide for Premium on redemption of preference shares. Thus, no charge was to be created to Profit and Loss Account of the company in respect of premium on redemption of preference shares.

In this context, it may be noted that the Companies Act, 2013 provides that certain class of companies (to be prescribed) are required to provide for the premium payable on redemption of preference shares only out of the profits of the company.

Thus, while the above may be EPS negative for such companies, it would reduce the book profits from a MAT levy perspective.

Conclusion

On an overall basis, the MAT levy is not expected to change significantly on an immediate basis under the new Company law regime. Impact on foreign companies certainly needs to be considered in light of the expanded reach to cover such entities having some India linkage. The big ticket change can be expected when the current ICAI-Accounting Standards are sought to be substituted either by IFRS-based IND-AS or in any other manner. Till then, the Corporates can breathe easy.