IFRS Convergence Income Tax Matters

1. IFRS Convergence Income Tax Matters June 30, 2010

2. Contents • Tax computation Income-tax Act, 1961– adjustments to book profit • IFRS convergence – Illustrative tax considerations • Fundamental matters • Use of IFRS as base financials - Potential difference • MAT considerations • Tax consideration by other countries • Conclusion

3. Tax computation- Illustrative adjustments to book profits under Income-tax Act, 1961 (‘the Act’) Profit before tax as per Indian GAAP • Depreciation as per books • Provision for bad debts/ obsolete stock/ warranty costs/ etc • Loss on sale of investment • Unrealised losses on foreign exchange re-translation • 43B items (Bonus, exgratia etc) • Other specific disallowances Add: Disallowances/ taxable income Less: Allowance/ exempt income • Depreciation as per tax • Profit on sale of fixed assets • Exempt income • Other specific allowances Taxable income as per Income tax Act

4. Illustrative tax considerations – Fundamental matters Base financial statements for computation of taxable income – Adjusted IFRS financial statements or Indian GAAP financial statements Subsequent to the convergence to IFRS, for the purpose of computing the taxable income, Government would need to consider whether the taxable income will be computed based on the IFRS financial statements or financial statements prepared in accordance with Indian GAAP accounting standard (Part II standards). Treatment of one-time adjustments • On transition to IFRS, certain one-time adjustments will have to be recorded in the financial statements The Government would need to clarify the tax implications of such adjustments under the Act. Phased adoption of IFRS • As per roadmap to convergence prescribed by MCA, some companies will mandatorily need to follow IFRS converged standards from 1 April 2011, while other companies will have to follow it from a later date or would have a choice to adopt early The Government would need to clarify the inconsistency in income tax treatment created due to such a phased approach to IFRS

5. Illustrative tax considerations – Use of IFRS as base financials Profit as per IFRS Adjustments: Legends • Preference share capital - Dividend on preference shares A - Premium on redemption of preference shares A • Revenue recognition - Sale of goods B - Extended credit terms C - Discounts and rebate on sales D - Customer loyalty programs E - Multiple deliverables F - Linked contracts G • Share based payments - Recognition at fair value H - Group share based payments I • Recognition and measurement of financial assets and liabilities J • Treatment of notional gains/losses - Low interest/ interest free loans to employees K - Inter group loans, advances and deposits at concessional interest rates L - Interest free security deposit on leasing arrangements M • Profit as per Indian GAAP

6. Illustrative tax considerations – Use of IFRS as base financials (Continued) Legends IFRS requirements and tax clarifications

7. Illustrative tax considerations – Use of IFRS as base financials (Continued) Legends IFRS requirements and tax clarifications

8. Illustrative tax considerations – Use of IFRS as base financials (Continued) Legends IFRS requirements and tax clarifications

9. Illustrative tax considerations – Use of IFRS as base financials (Continued) Legends IFRS requirements and tax clarifications

10. Illustrative adjustments to Other Comprehensive Income • Foreign currency translation differences for foreign operations • Net change in fair value of available-for-sale financial assets • Change in actuarial gains and losses on defined benefit plans • Tax adjustments on the above Compulsory adjustments Optional adjustments • Effective portion of changes in fair value of cash flow hedges • Net gain/loss on hedge of net investment in foreign operation • Tax adjustments on the above

11. Illustrative tax considerations – MAT implications

12. Tax consideration by other countries The following countries have adopted IFRS. The transition to IFRS from a tax perspective have been dealt with by the Governments in these countries as under: Countries Tax implications on IFRS transition 12

13. Conclusion (1/2) • IFRS will be adopted in India by different companies in a phased manner • Complicated tax structure in India - Regular Tax - Current Laws - DTC & Proposed Changes - MAT - Book Profit Based • Several Complex Issues under IFRS on recognition of Income and liability (expenses) • Both Corporate and Revenue department will need time & experience to gain clarity on various issues. • It appears that, in all possibility , even for financial and commercial reasons, companies may have to prepare two sets of accounts i.e IFRS and Indian GAAP, basically to have comparative data.

14. Conclusion (2/2) • Current Indian GAAP and Tax Law are having Inter-face for several years. Law has been settled through series of court pronouncement. Even then large number of litigation are continuing worry for the corporates. Use of IFRS based financial statements for tax computation is bound to give rise to large scale tax litigation. Given the above scenario , it will appropriate to recommend as follows • Tax and Taxable Income should be continued to computed based on Indian GAAP Accounts at least for 2-3 years. • Revenue Authorities should not take any cognizance of IFRS based FS for the purpose of tax proceedings. • The group should continue to explore IFRS based taxable Income computation example: IFRS – Indian GAAP – Taxable Income on revenue neutral concept.

15. Annexure 1 – (1/2) Example: Company A gives loan given to employee of INR. 1,000,000 which is repayable in one installment after 5 years. No interest is charged from the employee. The market interest rate is 10% at the time of giving the loan. Solution: 15

16. Annexure 1 – (2/2) The Government would need to clarify the deductibility of notional interest cost and taxability of notional interest income and applicability of withholding tax provisions and the time of recording such notional employee cost. 16

17. Thank You 17