The bad loan recovery exercise now has a puzzle to solve: Who pays the 20% minimum alternate tax (MAT) on book profits when assets are written down?
The problem, say industry trackers, is that the purchase of a distressed asset triggers write-downs in the profit and loss (P&L) accounts of companies, resulting in likely book profits. Existing laws require that MAT be paid on book profits.
“Where loans are written off or restructured, there would be book profits.Some of that may get negated with the write-off of assets, but the net impact may create a book profit, attracting MAT,“ said Abizer Diwanji, national leader for Restructuring Services, EY India. Resolution professionals are now debating whether the new buyer, or the lender, would foot the MAT bill.
Experts say in some cases where companies have created fictitious assets or the value of assets reduced drastically, companies will also have to record write offs. Still, the net impact may create a book profit.
“In cases where a company is taken over under the insolvency code, and where a significant portion of the loan liability is extinguished as part of the resolution, the question that would arise is regarding the tax impact arising out of writing back liability as income. The issue whether such write-back is income, and therefore, impacts the quantum of carried forward losses and whether such income is liable to MAT remains debatable in the absence of specific provision to this effect under the Income-Tax Act,“ said Milind Kothari, managing partner of BDO India.
In a normal situation, if a company has a debt of `40,000 crore and the new buyer buys it for `10,000-30,000 crore, it will have to be recorded as write-back in the company's P&L, eventually increasing the company's book profit. And MAT of 20% will be applicable on that -`6,000 crore in this case.
MAT may not have been a problem but for the new accounting standards adopted by India. New Delhi changed its accounting standards from GAAP to Ind-AS -the latter being on a par with IFRS -from April 2016. Under Ind-AS, fair value of assets is recorded and reassessed every year. This also applies to loans.
“As the rules stand today , any writedowns or hair-cut taken by lenders will be treated as gains in the company's profit and loss (P&L) statement, and hence, will attract 20% MAT. This may not have been a problem under earlier accounting standards, but under Ind-AS fair value of debt is taken into consideration,“ said an accounting partner at one of the Big4 firms.
Insiders say this has been one of the biggest issues facing lenders. Many do not intend to pay MAT and want the new buyer to bear the liability. However, MAT would be triggered in the current financial year and in some cases lenders may have to treat it as an additional haircut on the loans.
Some of the lenders have even approached the Central Board of Direct Taxes (CBDT).
“The CBDT has been approached on the matter as a net outflow of tax on restructuring could impact enterprise value, and hence, level of sustainable debt,“ said Diwanji of EY.
Insiders say not many potential buyers who are looking to take over debtridden companies may want to shell out the extra amount in the form of MAT.
“If there is no clarity on MAT, lenders will be forced to pay MAT, as no potential buyer would pay 20% over and above the asking price. Many buyers may factor in MAT liability while bidding for assets of insolvent companies,“ said a person close to the development.
“This requires urgent redressal to make the resolution process definitive so that it does not become a can of worms for the new acquirer of stressed companies,“ said Kothari of BDO.