MARCH 24, 2008
By Praveen Chopra
THE purpose behind introduction of MAT was to tax Corporates which distributed substantial dividends without paying any Income-tax. [Refer Explanatory Memorandum on Direct Taxes in the Finance Bill of 1996-97]. Provision for deferred tax under the Accounting Standard 22 (AS-22) of the Institute of Chartered Accountants of India (ICAI) in the Profit & Loss Account has been made mandatory vides Section 211 (3A), (3B) & (3C) of the Companies Act, 1956 read with Notification no. G.S.R. 739(E) dated 7th December 2006 of the Ministry of Company Affairs. Therefore deferred tax reduces the profits of the corporates and thereby its ability to distribute dividends [See Section 205 with Section 211 of the Companies Act, 1956]. This has the effect of narrowing down the difference between the book profits and the tax profits.
As mentioned above, the wide divergence between the book profits and tax profits and consequent distribution of dividend without payment of Income-tax was the concern that led to the imposition of MAT. By narrowing down the difference between the two profits and reducing the ability of the company to distribute dividend, the Provision for deferred tax addresses the aforesaid concern to a large extent. The Institute of Company Secretaries (ICSI) have also clarified in its Secretarial Standard No.3 [See para 1.1.5 of the Standard] that dividend is to be distributed on profits after providing for deferred tax. Hence the proposal to add back the provision for deferred tax will result in distortions and incongruities. Going by the concerns that had led to the imposition of MAT, logically the tax ought to be levied on that book profit which a company can distribute as dividend. Hence this amendment appears to be illogical.
For the same reason also, deferred tax is not a ‘below the line’ item as stated in the Explanatory Memorandum on Direct Taxes (clause 20) in the Finance Bill, 2008. In the March 2007 issue of the journal of the ICAI - The Chartered Accountant – it was clarified that deferred tax is ‘above the line’ item. [see para 18 in page 1472 of the journal].
Following the aforesaid rationale, the other proposal in the Finance Bill 2008 to add back the provision for dividend distribution tax cannot be faulted as this is related to distribution of dividend and is a ‘below the line’ item. However, this is not the case with Provision for deferred tax. Examination of the P&L account of any corporate will reveal that dividend distribution tax is included in the Appropriation account whereas the Provision for deferred tax is included in the main P&L account.
It may be questioned that the aforesaid arguments apply with equal force to Provision for ‘current tax’. Then why no representations are being made against the existing MAT provisions that require the provision for current tax to be added back? The answer to this would be that provision for current tax represents the tax actually payable on the current profits and MAT provisions go to determine that tax. Hence it is illogical to remove the end result of the process of determining the tax in the process itself – it would result in a closed loop. But the same does not apply to ‘deferred tax’.
Had it been permissible for a company to add back the provision for deferred tax to arrive at the profits for distributing dividend then the proposed amendment would have been logical. But a company is not permitted to do this.
Certain benefits under the Income-tax Act do not accrue to the assessee in perpetuity. The benefit obtained in one year reverses in succeeding years. Therefore they are transient or temporary. Depreciation is one such example. Under the concept of ‘true & fair’ accounts as mandated in Section 211 of the Companies Act, temporary benefits are not permitted to be recognized as income. Therefore such tax benefits are removed from the income/profits through the mechanism of the deferred tax provision whereas tax benefits that accrue to the assessee in perpetuity like for example tax exemption under erstwhile Section 80HHC do not stand covered within the scope of deferred tax provisions. This concept of not recognizing temporary benefits as income in the books pervades across the entire spectrum of accountancy and not only to tax benefits. For instance, a loan received is a temporary benefit because it has to be repaid subsequently. Hence accountancy principles do not allow a loan to be treated as an income in the year of receipt and an expense in the year of payment. It is this concept that has been given a structural shape in the form of deferred tax in relation to temporary tax benefits.
It is therefore unfortunate that in their obvious hurry to negate the as yet unreported judgment of the Kolkata High Court in the case of Balarampur Chini Mills that held that the provision for deferred tax liability is an admissible deduction for MAT, the officials in the Finance Ministry have come out with this amendment without examining in detail the concept behind the deferred tax provision and the basic objects and concerns that had led to the imposition of MAT in the first place and how this provision for deferred tax actually go to address that concern. The Explanatory Memorandum in the Finance Bill 2008 on this matter also depicts the unclear mind of the officials on this subject. While on the one hand it is stated that items like deferred tax were “thought to be included in the term income-tax”, in the actual amendment it has not been included in the term income-tax and a separate clause has been inserted for add back of deferred tax.
Therefore it would be in the fitness of things if the officials had a re look at the proposal to add back the provision for deferred tax for the purpose of levy of MAT before pushing through with the amendment. They would perhaps also do well to consult the Institute of Chartered Accountants of India on the matter.
(The views expressed are personal of the author)
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