(First published on Linkedin)
The introduction of IndAS has reshaped how transactions are accounted for, creating a ripple effect on tax and regulatory frameworks.
Background
Recently, the Supreme Court held that an acknowledgment of liability in financial statements can reset the limitation period under IBC. This ruling, combined with the deeming fictions under IndAS, exemplifies the increasing weight that accounting carries.
Examples:
1. IndAS 103 – Acquisition Accounting and Intangibles: Acquisition accounting requires recognition of intangible assets, leading to a prima facie tax amortization This becomes a double-edged sword: while amortization can reduce taxable profits, it may also impact a company’s EPS unless the intangibles are classified as having an indefinite useful life, which avoids amortization in books but could raise increased scrutiny under tax.
2. Appendix D to IndAS 109 – Extinguishment of Financial Liabilities: When financial liabilities are extinguished, and convertible instruments are issued at discounted conversion terms with the same face value, the gap between the extinguished debt and the FMV of the new instrument is recognised as gain in the books. However, this could be treated as deemed benefit under section 28(iv) and be taxed. Under IGAAP, this might have been neutral, or at least it would have been deferred till actual conversion.
3. Redeemable Preference Shares as Liabilities: RPS are recorded as liabilities, with the coupons classified as interest. While this impacts PBT, it doesn’t result in a tax deduction. For overseas investments, these shares are considered part of the share capital, which contributes to net worth calculations—an inconsistency with how they’re represented in the books. Similarly, CCDs, although equity, don’t form part of share capital and thus aren’t counted towards net worth.
4. Hybrid Instruments like CCDs: CCDs, which carry interest is partly classified as debt, while the residual is equity. This raises issues under FEMA—whether CCDs should be treated as equity instruments, which don’t require RBI approval, or debt instruments, which do, as highlighted in the Hubtown case.
5. Demerger Accounting under Appendix A of IndAS 10: Demergers are accounted as deemed distribution of assets to shareholders under IndAS for non-common control demergers. In cases where demergers are considered as non-tax neutral, the deemed distribution of assets may be treated as a dividend for tax purposes.
6. Share-Based Payments (IndAS 102): Under IndAS 102, share-based payments to employees, say a private equity investor to a founder in recognition for his/ her services, could be recognised as expense in the P&L, impacting the PBT and net-worth. Reduction in net worth could further impact overseas investments, which is linked to net worth of the company.