Budget 2013 has raised several peculiar accounting issues. For taxable income exceeding Rs 10 crore, tax surcharge will be increased from 5 per cent to 10 per cent for domestic companies, and from 2 per cent to 5 per cent for foreign companies. Presenting the Budget, Finance Minister P. Chidambaram said the additional surcharge will be in force for a year.

The first issue that arises is whether a company should consider the proposed increase in surcharge/ tax rate for determining its tax expense on account of deferred tax asset/ liability (DTA/ DTL) as at, and for the period ending March 31, 2013. It may be noted that under AS-22 the DTA/ DTL should be measured using tax rates and laws enacted/ substantively enacted by the reporting date.

One view is that the budget is a proposal, which becomes a substantive enactment only when passed by both Houses, and if the President’s assent is considered a mere formality. Thus, a company cannot consider budget proposals in determining its tax expense and DTA/ DTL as on March 31, 2013, unless the budget is passed by that date.

The counterargument is that as the budget was announced before March 31, 2013, the law is almost there, and subsequent passage by both Houses confirms the existence of the law at the reporting date. Thus, a company includes the impact in its March 31, 2013 financial statements if the budget is passed or expected to become law before the finalisation of the statements.

A company should apply the selected view consistently. Notwithstanding the stand taken, if the impact of the proposed change is material, it is preferable that the company makes a suitable disclosure in the notes on the policy adopted and its impact.

Furthermore, as the Finance Minister has stated that additional surcharges will apply only for one year, should a company apply higher tax rate for the entire DTA/ DTL, or only the amount expected to be realised/ settled within one year? As AS-22 requires deferred tax computation based on enacted/ substantively enacted tax rate, a company should consider a higher rate for the entire amount until the provision to abolish additional surcharge is included in the Income-tax Act.

To fuel growth of the manufacturing sector, the budget proposes an investment allowance at 15 per cent for any manufacturing company that invests more than Rs 100 crore in plant and machinery during April 1, 2013 to March 31, 2015. If a new asset is sold/ transferred, except in connection with amalgamation or demerger, within five years from installation, the deduction (along with gain arising on sale/ transfer) will be taxable.

A company will recognise the current tax benefit arising from the allowance in the year of deduction. The company may have to surrender the benefit if it sells or transfers the asset within five years from installation. Would that mean that the tax benefit received is contingent for the next five years, and can be recognised only after the fifth year? In the context of the special reserve created under section 36(1)(viii) of the Income-tax Act, it may be noted that the expert advisory committee of the Institute of Chartered Accountants of India opined that DTL should be recognised, as the amount can be reversed on eventual utilisation of the reserves.

However, it may be argued that the requirements of the proposed section are different from those under section 36(1)(viii), which does not specify any time limit for utilising the reserves without paying additional tax. Hence, that opinion is not relevant here. Considering the specific requirement of the proposed section, a company may not create DTL if it does not expect to sell or transfer the asset within five years. It should provide appropriate evidence — though demonstrating virtual certainty is not required as that applies for DTA in case of carry forward losses/ unabsorbed depreciation.

Vishal Bansal is senior professional in a member firm of Ernst & Young Global

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