Abhinava Bhavani Prasad
Existing Scenario –
Under Provisions of Sec. 145(2), Two Tax Accounting Standards have been notified on 25th January 1996 –
- Disclosure of Accounting Policies.
- Disclosure of Prior Period Items & Extraordinary items & changes in Accounting Policies.
To overcome the conflicts between Income as per Books & taxable income compute for income tax , Tax Accounting Standards for the computation of taxable income rather than just of accounting purpose is changed to Income Computation Disclosure Standard with main aim of reducing litigations & to avoid the disputable tax issues.
In 2010, Ministry of Corporate Affairs has announced Road map (for converging Indian Financial Reporting with IFRS)
Challenge faced by corporate sector
How this change in financial reporting would impact taxable income, as many companies would report using Ind-AS while others would report using older Accounting Standards (AS)
Central Board of Direct Tax set up a committee (Chosen to go down the path of prescribing a separate framework for Computation of taxable income)
As a part of their report they issued 14 draft tax accounting standards for public comments in October’ 2012, thereafter Ministry of Finance published a revised set of 12 draft standards on 8th January’ 15 for final comments
Finally Central Board of Direct Tax notified 10 standards under Sec.145(2) of Income Tax Act, 1962 vide Notification No. 32/2015 [F.No.134/84/2010-TPL]/SO 892(E) on 31st March’ 15.
All Assessees (corporate or non corporate) ⇒ Having⇒ Income – ‘Profits & Gains from Business or Profession’ or ‘Income from Other Sources’ ⇒ Following Mercantile System of Accounting
Effective Date – 1st April’ 2015
Income Tax Act v/s ICDS
In case of conflict between ICDS & provisions of the ACT, the provisions of the ACT shall prevail.
Taxable Profits as per ICDS ⇒
Profits Computed under Ind-AS or Existing AS
Adjustment of difference between ICDS & Ind-AS or Existing AS
Transitional Provisions –
All ICDSs (except ICDS VIII on Securities) Contain Transitional Provisions to facilitate first time adaption & prevent any tax leakage or any double taxation
Disclosure requirements –
All ICDSs (except ICDS VI on Effect of changes in foreign exchange rates & ICDS VIII on Securities) Contain specific disclosure requirements
Separate Books of Accounts –
No requirement to maintain books of accounts, ICDS is only for purpose of computation of income.
Comparative Analysis –
|AS||AS Notified by MCA||Notified as ICDS||ICDS|
|1||Disclosure of Accounting Policies||Accounting Policies||I|
|2||Valuation of Inventories||Valuation of Inventories||II|
|4||Contingencies & Events occurring after the balance sheet date||It was proposed in 2012 draft but dropped in Jan 2015 draft.||–|
|5||Net profit or loss for the period, prior period items & changes in accounting policies||It was proposed in 2012 draft but dropped in Jan 2015 draft.||–|
|7||Construction Contracts||Construction Contracts||III|
|9||Revenue Recognition||Revenue Recognition||IV|
|10||Accounting for Fixed Assets||Tangible Fixed Assets||V|
|11||The effect of changes in foreign exchange rates||The Effect of Change in Foreign Exchange Rates||VI|
|12||Accounting for government grants||Government Grants||VII|
|13||Accounting for Investments||Securities||VIII|
|14||Accounting for Amalgamation||No||–|
|15||Employee benefits (revised 2005)||No||–|
|16||Borrowing costs||Borrowing Costs||IX|
|18||Related Party disclosures||No||–|
|19||Leases||It was proposed in 2012 & Jan 2015 but dropped in notification of 31.03.15||–|
|20||Earning per share||No||–|
|21||Consolidated financial statements||No||–|
|22||Accounting for Taxes on Income||No||–|
|23||Accounting for Investments in associates in consolidated financial statements||No||–|
|25||Interim financial report||No||–|
|26||Intangible Assets||It was proposed in 2012 and Jan 15 draft but dropped in notification of 31.03.15||–|
|27||Financial reporting of interest in Joint Ventures||No||–|
|28||Impairment of assets||No||–|
|29||Provisions, Contingent Liabilities & Contingent Assets||Provisions, Contingent Liabilities & Contingent Assets||X|
|30||Financial Instruments recognition & measurements||No||Issued by ICAI but not notified by MCA|
|31||Financial Instruments, Presentation||No|
|32||Financial Instruments, disclosures||No|
ICDS – I – Accounting Policies – AS – 1
Deals with disclosure of significant accounting policies
All Contract or Transaction existing on the 1st day of April 2015, or entered into on or after 1st day of April 2015 shall be dealt with in accordance with the provisions of this standard
- No recognition to concept of ‘Materiality’
- Eliminates the concept of ‘Prudence’ – disallows recognition of expected losses or mark to market losses unless specifically permitted by any other ICDS.
- No changes in accounting policies without ‘reasonable cause’
- No guidance on impact of change in policies on the computation of income.
- Treatment & Presentation of transactions & events shall be governed by their substance & not merely by the legal form.
All Significant accounting policies adopted by a person shall be disclosed
ICDS – II – Valuation of Inventory – AS – 2
Deals with Valuation of Inventory
Inventory lying on 1st April 2015, if continued to exist on 31st March 2015 shall comply with standard
- Value of opening inventory –
- Should be same as preceding year’s closing inventory.
- Cost of inventory as on day of commencement of business (in case of new)
- Method of Valuation –
- Doesn’t permit Standard Cost method.
- Shall not be changed without reasonable cause.
- Dissolution of Partnership Firm / AOP / BOI –
- Inventory on date of dissolution shall be valued at net realizable value.
- Borrowing Cost on Inventory allowed.
- Inventory of service providers –
- Include labor and other costs of personnel directly engaged in providing service including supervisory personnel and attributable overheads
- The accounting policies adopted in measuring inventories including the cost formulae used
- The total carrying amount of inventories & its classification.
ICDS – III – Construction Contracts – AS – 7
Determination of income in respect of construction contracts
All Contracts running as on 31st March 2015 shall be complying with the standard.
- Contract Revenue in respect of retention money shall be recognized on Percentage of Completion Method (POCM).
- Doesn’t allow for reduction of incidental income (pre construction interest, dividend & capital gains) from construction cost.
- Losses incurred shall be allowed only in proportion to POCM.
- Early Stage of Contract – [Cost = Revenue, till POC is 25 %]
- Where the outcome of the contract cannot be estimated reliably contract revenue is recognized only to the extent of cost incurred. The early stages of contract shall not extend beyond 25% of the stage of completion.
- No provision to decrease contract revenue.
- Doesn’t permit recognition of foreseeable losses.
- Recognition of incentive payments & claims is to be done under POCM, if they are reliably measurable & it is probable that it will result in revenue.
- The accounting policies adopted in measuring inventories including the cost formulae used
- The total carrying amount of inventories & its classification.
ICDS – IV – Revenue recognition – AS – 9
Deals with recognition of Revenue from Sale of goods, Rendering of services, Interest, Royalties or dividends
On construction contract shall mutatis mutandis apply to the recognition of revenue and the associated costs for a service transaction undertaken on or before 31st March 2015 but not completed by the said date.
- Prescribes only Percentage of Completion method for recognition of service transactions.
- Dividend is to be recognized as per provisions of act.
- In an agency relationship, the revenue is the amount of commission and not the gross inflow of consideration.
- Sale of Goods –
- ICDS is in line with AS 9 except the criteria that revenue shall be recognized when there is reasonable certainty of its ultimate collection.
- Total amount not recognized as revenue during the year due to lack of reasonable certainty of its collection along with nature of uncertainty;
- The amount of revenue from service transactions recognized as revenue during the year;
- The method used to determine the stage of completion of service transactions in progress; and
- For service transactions in progress at the end of year: (a) Amount of costs incurred and recognized profits (less recognized losses) up to end of year; (b) The amount of advances received; and (c) The amount of retentions.
ICDS – V – Tangible Fixed Assets – AS – 10
Deals with Treatment of Tangible Fixed Assets
The actual cost of the assets shall be recognized in accordance with the provisions of this Standard if the acquisition or construction has commenced before 1st April, 2015 but not completed by the said date and cost incurred before 1st April 2015 shall be considered
- Machinery spares which can be used only in connection with an item of tangible fixed asset and their use is expected to be irregular, shall be capitalized
- When a tangible fixed asset is acquired in exchange for other asset or shares or other securities, the fair value of the tangible fixed asset so acquired shall be its actual cost
- When several assets are purchased for a consolidated price, the consideration shall be apportioned to the various assets on a fair basis
- Revaluation is not permitted by ICDS
- Description of block of assets
- Rate of depreciation
- Actual cost or written down value
- Additions or deductions during the year with dates
- Depreciation Allowable
- WDV at the end of the year. (Already being disclosed as part of Form 3CD and ITR for additions of assets)
ICDS – VI – Effect of Changes in Foreign Exchange Rates – AS – 11
Treatment of transactions in foreign currencies, translating the financial statements of foreign operations; Treatment of foreign currency transactions for forward exchange contracts
All foreign currency transactions existing on 01-04-2015 or undertaken on or after 01-04-2015 shall be recognized in accordance with provisions of this standard
- Conversion at last date of previous year
- Monetary items – converted into reporting currency by applying closing rate.
‘If closing rate doesn’t reflect with reasonable accuracy – monetary item shall be reported at the amount which is likely to be realized from or required to disburse’
- Non Monetary items – converted into reporting currency by using exchange rate at the date of transaction
- Exchange difference to be recognized as income or expense subject to provisions of sec. 43A of the Income Tax Act, 1961 & Rule 115 of Income Tax Rule, 1962.
- Exchange difference on translation of non integral foreign operations shall be recognized as Income instead of creating foreign currency translation reserve.
- Gains or losses on forward contracts shall be recognized only on settlement.
Disclosure – NA
ICDS – VII – Government Grants – AS – 12
Deals with the treatment of Government grants (subsidies, cash incentives, duty drawbacks, waiver, concessions, reimbursements)
Government grants, which meet the recognition criteria after 31st March, 2016, shall be recognized in accordance with the provisions of this Standard after taking into account the amount of the grant recognized on or before 31st day of March, 2016
- Recognition of government grant shall not be postponed beyond the date of actual receipt.
- No Grant can be treated ‘Promoters Contribution’, either reduced on value of asset (depreciable asset) or treated as income on periodic basis (non depreciable asset)
- Grants reduced from the actual cost of the asset or from the WDV of block of assets during the year;
- Government grants recognized during the year as income;
- Government grants not recognized during the year by way of deduction from the actual cost of the asset or assets or from the WDV of block of assets and reasons thereof
- Government grants not recognized during the year as income and reasons thereof.
ICDS – VIII – Securities – AS – 13
Deals with only securities held as stock in trade
Transitional Provisions – NA
- Valuation –
- Securities held as stock in trade – at actual cost initially recognized or NRV, whichever is lower (listed & quoted) & at actual cost initially recognized (unlisted & listed but not quoted)
- Securities acquired in exchange – at lower of fair value of security acquired or fair value of securities issued (exchange for other securities) & at its actual cost (exchange for another asset)
- Disposal of investments is not dealt in ICDS
Disclosure – NA
ICDS – IX – Borrowing Cost – AS – 16
Deals with treatment of borrowing costs but does not include the actual or imputed cost of owners’ equity and preference share capital.
All the borrowing costs incurred on or after 01-04-2015 shall be capitalized for the previous year commencing on or after 01-04-2015 in accordance with the provisions of this standard after taking into account the amount of borrowing costs capitalized, if any, for the same borrowing for any previous year ending on or before 31-03-2015.
- Exchange rate difference shall not be treated as borrowing cost
- Qualifying asset –
- Specified tangible & intangible assets are qualifying assets regardless of substantial period condition.
- Inventories that require 12 months or more to bring them into saleable condition.
- Income from temporary development of unutilised funds shall be taxable
- Capitalisation of Borrowing Cost –
- Specific Borrowings – Actual borrowing costs incurred during the period on the funds borrowed shall be capitalised from the date on which funds were borrowed
- General Borrowings – Cost determined by following formulae (A x (B / C)) need to be capitalised from the date o which funds were utilized
- A – Borrowing costs incurred during previous year except on specific borrowings
- B –
- Average cost of QA* appearing in balance sheet on first and last day of the previous year
- Half of the cost of QA*, if it does not appear in balance sheet on the first day or both first and last day of the previous year
- Average cost of QA* as on first day of previous year and date of completion, if it does not appear in balance sheet on the last day of the previous year
- C – Average of total assets*, other than those funded by specific borrowings, as appearing in balance sheet as on first and last day of previous year
*Except which are directly funded out by specific borrowing
- The accounting policy adopted for borrowing costs
- The amount of borrowing costs capitalized during the year
ICDS – X – Provisions, Contingent Liabilities & Contingent Assets – AS – 29
Provisions, Contingent Liabilities and Contingent Assets but excludes few clause of contracts/ Assessee
All provisions and assets shall be recognized for the year commencing after 31st March 2015 in accordance with the provisions of this standard after taking into account the amount recognized before the said date
- Provisions shall be recognized if it is ‘reasonably certain’ that outflow of economic resources will be required.
- ‘Onerous contracts’ are not specifically excluded from executory contracts.
- A brief description of the nature of the obligation;
- The carrying amount at the beginning and end of the year; c. Additional provisions made during the year;
- Amounts used, that is incurred and charged against the provision, during the year;
- Unused amounts reversed during the year; and f. The amount of any expected reimbursement
- A brief description of the nature of the asset and related income; b. The carrying amount of asset at the beginning and end of the year;
- Additional amount of asset and related income recognized during the year; and
- Amount of asset and related income reversed during the year.
- The ICDS seem to be based on the current AS issued by ICAI. Once Ind- As comes in, some companies would report based on Ind-As where as others would report based on existing Indian GAAP, therefore accounting profit based on which MAT is to be calculated would need to be clarified, and may require consideration of suitable adjustments to Ind-AS accounting profit.
‘Thus, providing clarity on the tax position in ICDS in alignment with the IND AS is essential’
- ICDS is not an extension of the Act rather it is a part of the Act which accords the treatment in respect of issues covered therein viz foreign exchange fluctuations, construction contract, tangible fixed assets etc. Hence, ICDS only meant to supplement the present Income Tax Act.
- Each ICDS requires disclosures in respect of various items dealt in the said standard. However, ICDS is silent about as to where such disclosure has to be given.
- The Central Government has to play a pro-active role through Central Board of Direct Taxes to provide clarity and reduce areas of litigation to ensure effective functioning of these Standards for a noble cause.
- Though there is no requirement under the Act to maintain separate books of accounts for tax purposes, the effect of implementation of ICDS is expected to be pervasive on the taxpayers as these would require system and process in place to capture the relevant information required by Income Computation & Disclosure Standards (ICDS).
Accordingly, this would put an additional compliance burden on the tax payer.
- Certain claims of receipt which were earlier not made taxable based on certain judicial principles are now taxable under ICDS. Their tax treatment is yet to be analyzed.
- In addition, some of the judicial pronouncements which were in favor of the assessees might no longer be operative. Suitable amendments would also be required to the act to provide certainty on some of these issues.
- Non Compliance with ICDS can be ground for an assessing officer to complete the Assessment under “Best Judgment Assessment” under Section 144.
(Author Abhinava Bhavani Prasad is a CA-Final Student, currently serving as an Article Trainee at Ganesh Prasad Chartered Accountants, Chennai & serving as an executive committee member of Chennai SICASA.)