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Tax Computation as per Income Tax Act, 1961

Presented By
Jaya Sudha R

December 3, 2022 1
 1 Foreign Exchange Fluctuations

AGENDA 2 Minimum Alternate Tax and Alternate

Minimum Tax

3 Deferred Tax Computation

T R E AT M E N T O F F O R E I G N
EXCHANGE
F L U C T U AT I O N S
Exchange fluctuation on Revenue/Capital Account
The Income Tax Act, 1961

Revenue Account Capital Account (43A)

The exchange fluctuations which are not related to The exchange fluctuations which are related to
acquisition, installation, disposition of any capital asset, acquisition, installation, disposition of any capital asset,
such fluctuations are treated to arise on Revenue such fluctuations are treated to arise on Capital Account.
Account.
Exchange loss is added and exchange gain is deducted
Exchange Loss is allowed as deduction and exchange from the actual cost of asset in the year of
gain is taxed in the year in which the same arise (Both REALIZATION.
realized and unrealized).
Note: Deferred tax is required to be created on
unrealized portion.

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Section 43A
The Income Tax Act, 1961

Conditions for the transactions: Foreign currency fluctuation

1. Assets MUST BE ACQUIRED FROM A 1. Transaction to be recorded at the foreign exchange
COUNTRY OUTSIDE INDIA by: rate prevailing on the date of transaction i.e.
(i) Date of taking loan
(i) Taking a loan in foreign currency (ii) Date of supplier’s credit
(ii) Taking supplier’s credit from supplier outside (iii) Date of accrual of interest income
India 2. If the above are translated at the rate prevailing on
(iii) Interest on above i.e (i) and (ii) till the date of 31st March, then no treatment to exchange
asset is actually put to use. Loss/gain. The impact of the same has to be nullified
from Profit and Loss Account while preparing
2. The amount of exchange gain/loss arisen on such Income tax return.
asset shall be added to the actual cost of the asset on 3. The exchange difference arising on actual payment
realization basis. In case of gain, the same shall be of above has to be added to/subtracted from WDV of
deducted from the actual cost of the asset. the block of asset.

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Section 43AA and ICDS
The Income Tax Act, 1961

Monetary Items Foreign currency fluctuation

Monetary items are money held and assets to be received 1. Foreign currency transactions to be recorded at the
or liabilities to be paid in fixed or determinable amount rate prevailing on the date of transaction.
of money. 2. If settlement takes place during the previous year,
the Profit/Loss on account of exchange fluctuations
1. Debtors abroad from exports. will be treated as business income/allowed as
2. Creditors abroad for imports. business expense.
3. Loan taken in foreign currency or foreign supplier’s 3. If not settled, then convert them on the exchange rate
credit for purchasing assets in India. prevailing on the last day of the previous year. The
4. Any other amount receivable in foreign currency. profit/loss on account of conversion on the last day
5. Any other amount payable in foreign currency except of previous year is business income/allowed as
loans/supplier’s credit for assets purchased outside business expense.
covered by section 43A.
6. Cash and Bank Balances abroad.
7. Amount receivable / payable from to foreign
branch/foreign subsidiary or any other person.
8. Moneys kept in foreign accounts on account of issue
of GDRS/ADR/FCCB/FCEB etc.,
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Section 43AA and ICDS
The Income Tax Act, 1961

Non-Monetary Items Foreign currency fluctuation

Non-Monetary Items are assets and liabilities other than 1. Transactions to be recorded at the foreign exchange
monetary items. Fixed assets, inventories and investment rate prevailing on the date of transaction.
in-equity shares outside India are examples of non- 2. Non-monetary items shall not be converted at the
monetary item. exchange rate prevailing at the end of the previous
year Except Inventory.
3. If non-monetary items are converted at the exchange
rate prevailing at the end of the previous year, then
the foreign exchange fluctuation gain shall not be
taxable and foreign exchange fluctuation loss shall
not be allowed as deduction.

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MINIMUM
A LT E R N AT E TA X
A N D A LT E R N AT E
M I N I M U M TA X
( S e c 11 5 J B a n d 11 5 J C )
Did Reliance Industries really not pay taxes
till 1996?
 MINIMUM ALTERNATE TAX (SECTION 115JB)
The Income Tax Act, 1961

Every Company Foreign Company, if

if the Income- tax(including surcharge i) Assessee is a resident of a country
and cess) payable on the total income, or specified territory with which India
computed as per the provisions of the Applicable to Not applicable to
has a DTAA or TIEA and the assessee
Income-tax Act in respect of any year does not have a permanent
is less than 15% of its book-profit + establishment in India or
surcharge (SC) + health & education
cess. Applicability &
Non
Applicability

Section 115BAA or 115BAB

Foreign Company, if
Not applicable to Not applicable to
ii) Assessee is a resident of a country
Provision of MAT shall not apply to a
with which India does not have DTAA
company which has opted for section
or TIEA and the assessee is not
115BAA or section 115BAB
required to seek registration under any
law for the time being in force.

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COMPUTATION OF MAT
The Income Tax Act, 1961

Book Profit u/s. Tax liability as

Normal tax liability
115JB
Tax Payable
per MAT(115JB)
Tax liability of the company Tax computed @ 15% (plus Higher of normal tax liability
computed as per the normal surcharge and cess as or MAT
provisions of the Income-tax applicable) on book profit is
Law, can be termed as normal Microsoft Excel called MAT.
tax liability. Worksheet

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MAT CREDIT
The Income Tax Act, 1961

If in any year the company pays liability as per MAT, then it is entitled to claim credit of MAT paid

1
over and above the normal tax liability in the subsequent year(s)
MAT Credit = Tax as per MAT – Normal Tax Liability
 MAT Credit may be carried forward to next 15 Years.

2 MAT Credit shall be allowed in the assessment year in which:

Tax payable under the normal provision of the act > Tax payable under section 115JB

3 MAT Credit to be allowed shall be:

Tax payable under the normal provision of the act – Tax payable under section 115JB

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UTILISATION OF MAT CREDIT
The Income Tax Act, 1961

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REPORT FROM CHARTERED ACCOUNTANT
The Income Tax Act, 1961

FORM 29B
 Every company to whom the provisions of section 115JB
applies is required to obtain a report from a chartered
accountant in Form No. 29B certifying that the book profit
has been computed in accordance with the provisions of
section 115JB.

 The report should be obtained on or before due date of

filing the return of income.

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ALTERNATE MINIMUM TAX (SECTION 115JC)
The Income Tax Act, 1961

Applicability of AMT Rate of AMT & Audit Adjusted Total Income

Report

 All assessee except • Tax computed @ 18.5% Taxable income of the taxpayer
Companies are liable to pay (plus surcharge and cess as Add: Deductions claimed u/s
AMT. applicable) on Adjusted 80H to 80RRB except 80P in
• However, AMT shall not be Total Income. taxable income.
payable by Individual/ HUF/  Assessee required to obtain Add: Deductions claimed u/s
AOP/ BOI/ Artificial a report from a chartered 35AD net off depreciation u/s
Juridical Person if Adjusted accountant in Form No. 29C 32 in taxable income
Total Income of such person certifying the computation Add: Deduction claimed u/s
does not exceed Rs. 20 of adjusted total income and 10AA
lakhs. AMT.
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D E F E R R E D TA X
C O M P U TAT I O N
TIMING DIFFERENCE
AS 22 – Accounting of taxes on Income

Year 1
Rs. 50 Lakhs – Rs. 25 Lakhs = Rs. 25 Lakhs will be
paid in future.

Year 2
Rs. 50 Lakhs = Rs. 25 Lakhs of current year + Rs.
25 Lakhs of previous year

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TIMING DIFFERENCE
AS 22 – Accounting of taxes on Income

 Company derives its book profits in accordance with the rules of the Companies Act and
calculates its taxable profit based on provision of the Income Tax Act.
 There is a difference between the book profit and taxable profit because of certain items which
are specifically allowed or disallowed each year for tax purposes.

Timing Difference Permanent Difference

 Temporary in Nature  Permanent in Nature
 Difference will get reversed in the matter of time  Difference will never get reversed (Not allowed in
(Allowed in future) future)

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DEFERRED TAX LIABILITY/DEFERRED TAX
ASSET
AS 22 – Accounting of taxes on Income

 The tax effect due to the timing differences is termed as deferred tax which
literally refers to the taxes postponed.
 Deferred tax is recognized only on timing differences.
 There are no DTA/DTL made for permanent differences.

Entity profit status Entity – Current Entity – Future Effect

Book profit higher than the Creates Deferred Tax

Pay less tax now Pay more tax in future
Taxable profit Liability (DTL)

Book profit is less than the Creates Deferred Tax

Pay more tax now Pay less tax in future
Taxable profit Asset (DTA)

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VIRTUAL CERTAINTY – (Unabsorbed Depreciation & Tax Losses)
A 22 – Accounting of taxes on Income

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PRESENTAION AND DISCLOSURE
A 22 – Accounting of taxes on Income

I. Set off of DTA/DTL

II. Deferred tax liability should be shown under separate heading “Non-current liabilities”
III. Deferred tax asset should be shown under separate heading “Non-current assets”

Other points:
o Effect on Tax Holiday with respect to DTA/DTL Microsoft Excel
o MAT credit cannot be considered as DTA Worksheet

o Re-assessment of Unrecognised Deferred Tax Assets

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THANK YOU!