Implication of Tax Accounting Standards (TAS)

CA TUSHAR DOCTOR

Will taxpayers wake up from their sleep and make proper representation for proposed Tax Accounting Standard (TAS)

1. TAS are now meant to be the basis of computation of taxable income by a mere notification. As a result there would be amendments in the law without requiring amendments in the Act. One of the purpose of TAS is to harmonize the accounting standards issued by ICAI with the direct tax laws in India. In fact the proposed TAS would result in wide variance between figures as per books of accounts & figures for taxation purposes. At times it would even require maintenance of separate books in order to ensure that computation as per TAS is correct.    

2. Also TAS does not recognize concept of materiality. TAS are at variance with the commercial reality & will cause hardship to businesses.

3. It seems that the provisions of TAS are being utilized to overcome the ratio of various judgments, which were in favour of taxpayers. It is suggested that rather than having TAS which indirectly effect such amendments in the law, the law itself should be amended wherever required.

4. The notification No 9949 dated 25th January 1996 notifying the earlier two accounting standards under section 145(2) had clarified that those accounting standards applied only to taxpayers following the mercantile system of accounting. The interim draft of TAS also had such clarification. Such clarification is missing in the present draft. Thus the TAS proposes to include service providers also within its ambit. Some of such service providers follow cash method of accounting. Accounting for inventory would be contrary to the cash method of accounting followed by them. It needs to be clarified that this provision would not apply to service providers following cash method of accounting.

5. TAS provides that Prior period expense shall not be considered as allowable deduction in the previous year in which it is recorded unless the person proves that such expense accrued during the said previous year. Thus prior period expense will never be deductible as per TAS because it can never accrue in the previous year as it is an error of an earlier year.

6. TAS provides that where the ability to assess the ultimate collection with reasonable certainty is lacking at the time of raising any claim for escalation of price and export incentives, revenue recognition in respect of such claim shall be postponed to the extent of uncertainty involved. TAS does not allow postponement of recognition of revenue (other than claims for price escalation & export incentives). This is against the principle of accrual.

7. TAS provides that the record of tangible fixed assets shall be maintained in the tangible fixed asset register. Many non corporate entities may not be able to prepare such FA register as presently there is no such statutory requirement & details of FA acquired in the past may not be available.

8.  TAS provides that borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset shall be capitalized as part of the cost of that asset. Even cost of land is to be capitalized, which might lead to litigation as to the time when land is put to use.

9. Small and medium enterprises should be exempted from TAS as they do not have the infrastructure or expertise to handle complex adjustments required by TAS. Internationally also similar concession has been given to small enterprises.

10. Section 145(3) should be amended stating that not following of TAS should not result in rejection of books of account but result only in adjustment to the total income.

11. TAS calls for several disclosures. But currently there is no scope for any disclosures in the return of income. It is recommended that 3CD & tax return form should be modified. Also now the tax auditor will have to certify that computation of taxable income is in accordance with the provisions of TAS. It would be difficult for an auditor to certify compliance with TAS as computation of income is not a part of books of accounts & it will also add to the cost of tax payers.

12. TAS will give rise to an enormous amount of litigation, as issues are likely to arise regarding the meaning of various provisions of TAS.

13. TAS would place an enormous compliance burden on all businesses & enhanced expenditure & inturn affect the competitiveness of Indian business.