Accounting and Tax SAFA Countriesesafa.org/wp-content/uploads/2014/06/taxation-and... · 2017-01-28 · S No. Abbreviation Full Form 1 Act Income-tax Act, 1961 2 AO Assessing Officer

Accounting and Tax

SAFA Countries

CA Nihar Jambusaria &

CA Sanjiv Chaudhary

5th June 2014

Contents

1Accounting & Tax aspects

of SAFA Countries

3Goodwill-Treatment &

Judicial Precedents

4Preliminary Expenses &

Initial Set up cost

2

2Divergent Principles of

Accounting and Taxation

S No. Abbreviation Full Form

1 Act Income-tax Act, 1961

2 AO Assessing Officer

3 ICAI Institute of Chartered Accountants of India

4 AS Accounting Standard

5 SC Supreme Court of India

6 IFRS International Financial Reporting Standards

Glossary

3

Accounting & Tax –

SAFA Countries Perspective

4

5

India Sri Lanka Pakistan Bangladesh

Corporate

Tax

Domestic

companies: 30%

Foreign

companies: 40%

28%

(Venture

capital

companies:

12%)

35% 27.5%

(publicly

traded)

37.5% (other)

Capital

Gains

(other than

securities)

LTCG: 20% (with

Indexation)

STCG: 30% / 40%

NIL <1 year:35%

> 1 year: 35% on

75% of the gains

15%

Capital

Gains

(securities)

LTCG: NIL

STCG: 15%

NIL < 6 months:10%

12<; >6 months:

8%

>12 months: NIL

15%

Tax Provisions in SAFA Countries

Comparative Analysis

6


Carry

Forward of

Losses

8 years / 4 years Indefinitely and

set off is allowed

only upto 35% of

the statutory

income

Business

losses: 6 years

Speculative &

Capital Losses:

1 year

6 years

*Provisions

for carry

back of

losses

No No No No

Dividend

Income

Received from

Domestic co.: NIL

Received from

Foreign Co: 30%

Received from

specified Foreign

Co: 15%

Nil 10% 20%

Dividend declared

> 20% of face

value: 10% rebate

Dividend declared

< 10% of face

value: 37.5%

* Allowed in Australia, Singapore and European countries like France, Netherland, UK



7


Transfer

Pricing

Rules

Yes Yes Yes Not specific.

Thin Cap.

Rule

No Yes Yes No

CFC No No No No

No. of

treaties

with other

countries

More than 80 More than 38 More than 57 More than 27



8


* Tax

Consolidation

/ Group relief

Not permitted Not permitted Permitted Not permitted

** Transparent

Entities

Partners are

exempt from

their share of

profits and the

partnership firm

is liable to pay

tax.

- Partners are

exempt from

their share of

profits and the

partnership

firm is liable

to pay tax.

-

* Its allowed in Australia, Singapore and few European countries like France,

Netherland, UK etc.

** In USA, Mauritius, Switzerland and few other countries Partnership firms are

considered as fiscally transparent entities and partners are personally liable to tax

on their respective share of profits



9


Dividend 16.995% 10% 10% 20%

Royalty 25% 15% 15% 10%

Fees for

Technical

Services

25% NIL 15% 10%

Interest 5% / 20% 15% 20% 10%



10


Accounting

Principles

for

preparing

Financial

Statements

*Accounting

Standards issued by

ICAI.

Sri Lankan

Auditing and

Accounting

Standards

IFRS and

Company

Ordinance,

1984

IFRS

Preparation

of Financial

Statements

Annually. However,

few level of

companies are

exempt from

disclosing the

Financial

Statements

Annually Annually (all

private or

public

companies

whose paid-up

capital is more

than PKR 7.5 M

is required to

file with SECP)

Annually

Accounting Provisions in SAFA Countries


* ICAI has recommended the consolidated financial statements to be prepared

based on Indian AS convergence with IFRS however, the same is yet to be notified.

11

Reservation policy for MSME’s reserving exclusive

manufacture rights for certain items

Compulsory allocation of certain percentage of overall

lending by banks to these sectors

Refinancing facilities to these sectors doubled to

Rs 10,000 crores

3 year tax relief even after graduating to big companies

Various Schemes designed for these sectors to put them

in competitive & advantageous position

MSME & SME Sectors in India

Advantages

to

MSME’s &

SME’s

Accounting & Tax –

INDIA Perspective

12

Divergent Principles of Accounting & Taxation

Accounting

Vs

Tax

Financial statements

prescribes accrual

system of accounting

as the basis of AS-1

issued by ICAI.

Assets, liabilities,

income &

expenditure to be

accounted for on

mercantile basis.

TAXACCOUNTING

Section 145 of the

Act recognizes

both cash or

mercantile system

of accounting.

Typically tax

deductions are

allowable on

accrual basis

Exceptions under

section 43B and

40(a), wherein tax

deductions

allowable only on

cash basis.

13

“….Whether the taxpayer is entitled to a particular deduction or not will depend

on the provision of law relating thereto and not on the view which the taxpayer

might taken of its right nor can the existence or absence of entries in the books

of accounts be or conclusive in the matter.”

Kedarnath Jute

Mfg Co Ltd2

“…when the question is whether a receipt of money is taxable or not or whether

certain deductions from that receipt are permissible in law or not, the question

has to be decided according to the principles of law and not in accordance with

accounting practice. Accounting practice cannot override any provision of the

Act.”

Tuticorin Alkali

Chemicals &

Fertilisers3

“….. Accounting standard, which is continuously adopted by an assessee, can

be superseded or modified by legislative intervention. However , but for such

intervention or in cases falling under section 145(3), the method of accounting

undertaken by the assessee continuously is supreme.”

Woodward

Governor India

Pvt Ltd1

Judicial Precedents-

Dissonance of accounting and tax treatments

1.[2009] 179 taxman 326(SC) 2.[1971] 82 ITR 363 (SC) 3.[1997] 93 taxman 502 (SC) 14

Treatment of

Goodwill & Judicial

Precedents

15

Goodwill

Goodwill is recognized only

in a business combination

and is measured as excess of

sales consideration over the

net worth of assets.(AS-14)

Goodwill can be capitalized

and allowed to be amortized

over its useful life not

exceeding 5 years (AS-14)

Self generated goodwill not

allowed to be capitalized and

amortized in the books

(“Sunk cost”)- (AS-26)

Goodwill not defined under the Act

SC in the case of B.C. Srinivasa

Shetty held - “goodwill denotes the

benefit arising from connection and

reputation….. A variety of elements

goes into its making, and its

composition varies in different trades

and in different businesses in the

same trade…Its value may

fluctuate from one moment to

another depending on changes in the

reputation of the business”

Protracted litigation on whether tax

deduction on Goodwill available

CIT vs B.C. Srinivasa Shetty (1981) 128 ITR 294(SC)

16

Depreciation on Goodwill

Section 32(1) of the Act provides deduction in respect of

depreciation on :-

Tangible assets being building, machinery , plant, or

furniture; and

Intangible assets being know-how, patents, copyrights,

trade marks, licenses, franchises or any other business or

commercial rights of similar nature (#)

“any other business or commercial rights of similar

nature” not defined in the Act

Principle of ejusdem generis applies for interpretation

# - Inserted w.e.f. 1-04-1999 17

Judgment Principles laid down

Hindustan Coca

Cola Beverages

(P) Ltd.

[2009] 34 SOT

171 (Delhi)

Depreciation claim on business or commercial right in the nature of know-

how, patents, copy rights, trademarks, licenses, franchises cannot be

denied.

The true basis of depreciation allowance is the character of the asset and

not its description. Such rights may be termed as “goodwill” or otherwise

in the books of accounts.

A.P. Paper Mills

Ltd.

[2010] 128 TTJ

596 (Hyd)

The taxpayer derived advantages in the form of increased market share,

acquisition of various licenses and infrastructural benefits.

Benefits classified as a commercial right of similar nature enumerated in

section 32 entitled to depreciation.

Excess consideration paid by the taxpayer on amalgamation over and

above the excess of assets over liabilities was ‘goodwill’

Depreciation on Goodwill – Favourable Judicial Precedents

9

Judgment Principles laid down

R.G. Keswani

[2009] 116 ITD

133 (Mum)

The expression “all business and commercial rights” is too generic and

does not find similarity with the specific expressions like knowhow, patents,

licences etc.

Rule of ejusdem generic applies

Such a general expression of business and commercial rights cannot be

equated with expression “any other business or commercial rights of

similar nature”.

Borkar Packaging

(P) Ltd.

[2010] 131 TTJ

(Panaji) 99

Taxpayer was unable to establish it had acquired any rights of either

commercial or business nature.

Goodwill not purchased by the taxpayer but was appearing as a balancing

figure in taxpayer’s books of accounts for the assets acquired.

Accordingly, the taxpayer’s claim of depreciation on goodwill was not

allowed.

Depreciation on Goodwill – Unfavourable Judicial Precedents

10

Position prior to SC

Judgment

Depreciation not

allowable on goodwill

simplicitor

Depreciation could be

claimed on goodwill to

the extent represented by

intangible assets.

Generally depreciation

was allowed in respect of

intangible assets,

valuation of which was to

be supported by some

documentary evidences.

SC in case of Smifs Securities Ltd [2012] 24 taxman 222 (SC)

Principle laid in SC

Judgment

The scope of “any other

business or commercial

rights of similar nature” as

per explanation 3 (b) to

section 32(1) includes

Goodwill

Principle of ejusdem

generis would strictly apply

Difference between the

cost of an asset and

amount paid constitutes

goodwill, irrespective of the

fact that no amount paid

towards goodwill

20

Treatment of Pre-

incorporation

expenses & Judicial

Precedents

21

Illustration

Expenses ‘A’Date of

Incorporation of

Co (1-04-13)

Date of set up of

rubber

business(1-09-

13)

Date of setup of

spare parts

business (01-02-

14)

Expenses ’B’

New Set up (Expense A) Expansion (Expense B)

Accounts Tax Accounts Tax

Capital

Expenditure ?

Revenue

Expenditure ?

X Co was incorporated on 01.04.13 and set up the business of manufacture of rubber products

from 01-09-13, diversifying the activities it started manufacturing spare parts w.e.f. 01-02-14.

What shall be the

treatment of

expenses incurred

?

22

Same business or new establishment ?

Citation FactsRelevant principles- New business as a

distinct business

Hindustan

Times

[2012] 27

taxmann 191

(Del)

Taxpayer engaged in

business of printing and

publishing of newspapers &

periodicals.

Entered into a new

business of life insurance

Mere common funding not sufficient to regard

proposed business as a part of existing

business.

Unified administration and management,

resource sharing, personnel sharing also to be

examined for deeming the new business as

part of existing business.

Existing businesses had no inter- connection

with the new businesses

Blue

Mountain

Estates

[1985] 151

ITR 616

(Mad)

Taxpayer engaged in the

business of manufacture of

tea and coffee.

Started selling fertilizers

23

Same business or new establishment ?

Citation FactsRelevant principles- New Business as

expansion of existing business

Modi

Industries

[1993] 68

taxman 114

(Delhi)

Taxpayer engaged in

manufacture of various

commodities like sugar,

vanaspati etc

Started manufacturing

special alloy wire & billets.

The nature of activity of manufacture

remains the same in new and existing

business.

There was also unity of control and a

common fund. The necessary unity of

control leading to an inter-connection, inter-

dependence and inter-lacing of two

ventures existed.

A new product was added to the existing

business and thus new business is merely

extension of the existing business and not a

new business.

Jay

Engineering

[2008] 166

taxman 115

(Delhi)

Taxpayer engaged in

manufacture of fans and

sewing machines

Started a fuel injection

equipment project.

24

New Undertaking-Principles based on Judicial Precedents

Based on judicial precedents, the following

principles emerge on the basis of which, a new

industrial unit is said to have been set up :-

Investment of substantial fresh capital

Fresh employment of requisite labour

Manufacture or production of articles

Earning profits attributable to such undertaking

Separate and distinct identity of undertaking

25

Divergent Accounting and Taxation Principles

26

Expenditure on know-how

Research & Development Expenses

Finance Lease

Advertisement

Depreciation

Foreign Exchange Fluctuation

Other Areas of

diverse

treatment of

expenses in

accounts and

taxation

Thank You

CA Nihar Jambusaria

&

CA Sanjiv Chaudhary

Documents

Accounting and Tax SAFA Countriesesafa.org/wp-content/uploads/2014/06/taxation-and... · 2017-01-28 · S No. Abbreviation Full Form 1 Act Income-tax Act, 1961 2 AO Assessing Officer