IFRS Convergence Income Tax Matters. June 30, 2010. 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
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Income Tax Matters
June 30, 2010
Profit before tax as per Indian GAAP
Add: Disallowances/ taxable income
Less: Allowance/ exempt income
Taxable income as per Income tax Act
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
The Government would need to clarify the tax implications of such adjustments under the Act.
Phased adoption of IFRS
The Government would need to clarify the inconsistency in income tax treatment created due to such a phased approach to IFRS
Profit as per IFRS
- Dividend on preference shares A
- Premium on redemption of preference shares A
- Sale of goods B
- Extended credit terms C
- Discounts and rebate on sales D
- Customer loyalty programs E
- Multiple deliverables F
- Linked contracts G
- Recognition at fair value H
- Group share based payments I
- 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
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
- Regular Tax
- Current Laws
- DTC & Proposed Changes
- Book Profit Based
Given the above scenario , it will appropriate to recommend as follows
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.
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.