By Ashish Mehta, Partner, and Sanket Shah, Senior Partner, Khaitan & Co., Mumbai
On August 10, the Indian Revenue Authority issued rules for the calculation of accounting profit tax relief in cases where there has been an increase in accounting profit in a given year due to an advance price agreement (APA) or a secondary adjustment of previous years.
Accounting income tax and APA / secondary adjustments
Under the Indian Income Tax Act, certain companies are liable to pay tax based on accounting profits in an amount equal to 15% (plus applicable surcharge and tax) of their adjusted accounting profits or of tax calculated in accordance with the normal provisions of the Income Tax Act, 1961, whichever is greater.
Advanced pricing arrangements and secondary adjustments were introduced in Indian tax law in 2012 and 2017, respectively. Due to the time lag between the filing of tax returns and their assessment by the tax authorities, as well as the time lag between the request and the conclusion of a prior price agreement with the authorities, it is possible that the accounting profit of a subsequent year increases due to income from previous years. This is so because, from an accounting point of view, adjustments for transfer pricing provisions would be reflected in the accounting result of the year in which these adjustments were made or a prior agreement on the prices is concluded. Thus, a situation would arise where taxpayers would have to pay higher taxes based on book profits.
To remedy this situation, an amendment was introduced in February 2021 to provide a mechanism for the taxpayer to apply to the tax authorities to recalculate the accounting profit of the previous years and the tax payable during the year. following to reflect account changes of pre-agreed pricing, secondary adjustment, etc., relating to prior years.
The current notification implements the amendments (Section 115JB(2D) and Rule 10RB) providing tax relief.
Calculation of the tax allowance
The rule provides that the tax payable in the current fiscal year will be reduced by an amount calculated according to the formula: (A – B) – (D – C).
In this formula, “A” is equal to the tax payable by the company on its adjusted accounting profits of the current year, including past income that is included in the accounting profits of the current year in respect of adjustments due to an advanced price agreement or secondary adjustments.
“B” is the tax payable by the company on its current year adjusted accounting profits after deducting past accounting profits that are included due to adjustments due to advanced pricing agreements or secondary adjustments.
“C” is equal to all of the tax payable by the company on its adjusted book profit of the previous year or years to which the past income belongs.
Finally, “D” is the total tax payable by the company on its adjusted accounting profit of the previous year or years (referred to in point “C”) after increasing the accounting profit with the relevant past income of this or these years.
If the formulas give a negative number, the adjustment value will be zero.
In addition, the rules provide certain clarifications regarding amounts A through D.
The value of amount “A” in the formula would be zero if there were no tax payable on the current year’s adjusted accounting profits, including income from prior years.
The value of amount “B” in the formula would be zero if there were no tax payable on the current year’s accounting profit after deducting the accounting profit with the income of previous years.
For the calculation of the amount “C” in the formula, if during one or more past years, there is no tax payable on the adjusted book profits of this or these years, the tax to be pay for such year or years shall be deemed to be nil. .
For the calculation of amount “D” in the formula, if in a past year or years there is no tax payable on the adjusted accounting profit of that year or years after increasing the accounting profit with relevant past earnings for that year(s). , the tax payable for that year or those years is deemed to be nil.
Under Indian tax laws, tax paid on accounting profits can be carried forward for 15 years to be deducted from tax due under normal provisions. The notified rules provide that the company’s tax credit will be reduced by the amount of the tax relief calculated and authorized under these rules.
Request for tax relief
As part of the rules, the Central Board of Direct Taxes has announced the form (Form No. 3CEEA, to be filed electronically) for a business to claim this tax relief.
Under the Income Tax Act, accounting profits tax does not apply to companies that waive certain exemptions and opt for the preferential tax rate. However, these rules provide much-needed relief for businesses that have pre-arranged pricing and/or secondary adjustments and have not opted for the preferential tax rate.
In addition, it is also relevant to note that the provisions applicable to requests for rectification have been made applicable to such requests for tax relief and, therefore, the authorities should decide on such requests within six months. Hopefully, these requests will be processed quickly to enable businesses to calculate and pay the appropriate taxes on time.