By Ashish Mehta, Partner, and Sanket Shah, Principal Associate, Khaitan & Co., Mumbai
The Indian tax administration issued rules on August 10th for calculating tax relief on book profits if there is an increase in book profits for a given fiscal year due to an advance pricing agreement (APA) or a secondary adjustment from previous years.
Book Gains Tax and APAs / Secondary Adjustments
Under Indian Income Tax Law, certain companies are liable to tax based on book profits equal to 15% (plus applicable surcharge and consumption) of their adjusted book profits or taxes calculated in accordance with normal provisions of Income Tax Act. 1961, whichever is higher.
In Indian tax law, extended price agreements and secondary adjustments were introduced in 2012 and 2017, respectively. Due to the time interval between submitting the tax return and its assessment by the tax office and the time interval between the application and the conclusion of an advance price agreement with the authorities, it is possible that the book profit in a later year may be due to income from the last few years. From a balance sheet point of view, adjustments due to transfer pricing provisions would be reflected in the book profit of the financial year in which these adjustments were made or advance pricing agreements were made. This would create a situation where taxpayers would have to pay higher book profit taxes.
To address this situation, an amendment was introduced in February 2021 to provide a mechanism for the taxpayer to contact the tax administration to recalculate the book profit of the previous financial year and the tax payable in the following financial year to reflect changes take into account an advance price agreement, a secondary adjustment, etc. from previous financial years.
The current notification implements the changes (Section 115JB (2D) and Rule 10RB) that provide for tax relief.
Calculation of the tax relief
The rule stipulates that the tax payable in the current financial year is reduced by an amount calculated using the following formula: (A – B) – (D – C).
In this formula, “A” is the tax the company pays on its adjusted book profits for the current year, including past earnings that are included in book profit for the current year due to adjustments due to an early pricing agreement or secondary adjustments.
“B” is the tax the Company will pay on its Adjusted Book Gains for the current financial year after deducting from book gains any past income that was recognized due to adjustments due to early pricing or secondary adjustments.
“C” is the sum of taxes the company pays on its adjusted book profit for the past year or years, which includes past income.
Finally, “D” is the amount of tax that the company owes on its adjusted book profit for the last year or years (see point “C”) after increasing the book profit with the corresponding previous income of that year or years.
If the formulas result in a negative number, the adjustment value is zero.
In addition, the rules provide for certain requirements for the amounts A – D.
The value of the amount “A” in the formula would be zero if no tax were incurred on adjusted book profits for the current fiscal year, including income from previous years.
The value of the amount “B” in the formula would be zero if no tax were payable on the book profit for the current financial year after deducting the book profit with the income from previous years.
For the calculation of the amount “C” in the formula, if no tax is payable on adjusted book profits for this year or these year (s) in one or more previous year (s), which for this year / these year (s) zero tax payable.
For calculating the amount “D” in the formula if no tax is payable on adjusted book profits for that year (s) in one or more previous year (s) after the book profit is matched with the corresponding previous income for that year / this year (s) was increased. , the tax payable for that year (s) will be considered nil.
According to Indian tax law, the tax paid on book profits may be carried forward for 15 financial years and offset against the tax payable under normal regulations. The notified regulations provide that the company’s tax credit is reduced by the amount of the tax relief calculated and permitted under these regulations.
Right to tax relief
As part of the regulations, the Central Council for Direct Taxes has announced the form (Form No. 3CEEA, to be submitted electronically) for a company to take advantage of this tax relief.
According to the Income Tax Act, book profit tax does not apply to companies that waive certain exemptions and opt for the reduced tax rate. However, these rules provide the much-needed relief for businesses that have entered into upfront pricing agreements and / or suffered secondary adjustments and have not opted for the reduced tax rate.
In addition, it should be noted that the provisions applicable to correction requests apply to such requests for tax relief and the authorities accordingly decide on these requests within six months. Hopefully these requests will be processed in a timely manner so that companies can calculate and pay the relevant taxes in a timely manner.