At present India is going through one of the major tax reforms. In last two budgets our Finance Minister had introduce lots of things to make our economy globalize. “Income Computation and Disclosure Standards is one of the parts of that changing face. Finance Minister shows in his intention to notify these standards in his maiden Budget Speech in July 2014. The Ministry of Finance issued 12 ICDS for the public comment on 8th of January, 2015 till the 8th February, 2015. Later, Central Board of Direct Tax (CBDT) notified 10 standards under section 145(2) of Income tax Act, 1961 with the vide Notification No. 32/2015 [F. No. 134/48/2014- TPL]/SO 892(E) on 31st March 2015. This notification is applicable from Assessment year 2016-17 for both Corporate and Non-Corporate Assessee.
Need of ICDS
There always has been conflict between the Income as per Books and taxable income compute for income tax to overcome this issue the CBDT constituted a committee in 2010 to look the Accounting Standards for the computation of taxable income rather than just of accounting purpose named as TAS (Tax Accounting Standards) later is changed in to ICDS. The main aim of CBDT is to reduce the litigation and trying to avoid the disputable tax issues. In the first context, it is clarified that the ICDS is only applicable to those assessee whose income comes under the head of “Profit and Gains of Business or Profession (PGBP) or Income from other sources (IOS)”.
There are many areas where current accounting practice differs from the Income Computation and Disclosure standards through this article; I tried to enlighten those issues.
Key Features of ICDS
· Effective date of ICDS is 1st of April, 2015
· ICDS is applicable to each class of assessee whether resident or non-resident.
· No criteria are fixed for the applicability.
· No need to maintain separate books of accounts for the ICDS. It only for the calculation of taxable income.
· If in any case, dispute arises between the Income tax Act, 1961 and Income Computation Disclosure Standards, then income tax act will win the battle.
Name of the following ICDS Issued
1. ICDS I – Accounting policies
2. ICDS II – Valuation of inventories
3. ICDS III – Construction contracts
4. ICDS IV – Revenue recognition
5. ICDS V – Tangible fixed assets
6. ICDS VI – Effects of changes in foreign exchange rates
7. ICDS VII – Government grants
8. ICDS VIII – Securities
9. ICDS IX – Borrowing costs
10. ICDS X – Provisions, contingent liabilities and contingent assets.
Key Impact Areas
1. Accounting Polices
· The ICDS does not acknowledge the concept of prudence. Prudence is one of the basic fundamental assumptions used while selecting the appropriate accounting policies and principle. Therefore, ICDS disallow the early recognition of expected losses or marked-to-market loss unless if it comes under any other ICDS.
However, ICDS is silent about the treatment of marked-to-market unrealized gain.
· Further, ICDS is also not talked about the materiality concept which is considered in preparation and presentation of financial statement. Because ICDS is not talked about the maintenance of books or making company results.
· ICDS does not permit or allow the change is accounting policies unless if there is any reasonable cause. It’s matter of issue that ICDS does not define the reasonable cause and hence, it based on the management judgment and tax authorities exercise.
2. Valuation of Inventories
· In AS-2 ICAI specify the technique for measurement cost of inventories. It suggest the Standard cost or Retail cost for the results approximate the actual cost but use of standard cost in measurement of cost of inventory is not recommend in ICDS.
· To remove the confusion or try to avoid the litigation, ICDS incorporates the provision in ICDS-2 that is value of inventory of any business in the beginning of previous year i.e. 1st April 2015 shall be
(a) Same as the value of inventory as on the close of immediately preceding previous year; and
(b)The cost of inventory available, if any, on the day of commencement of the business when business has commenced from the previous year.
· One of the major issue in this, once assessee adopt the method of valuation of inventory shall not changed in any previous year unless until assessee have any reasonable cause. And reasonable cause is not defined anywhere in ICDS.
· An excepted provision, in case of dissolution of partnership or association of persons or body of individual inventory as on date shall be value at net realizable value (NRV) whether lower or higher than the cost of inventory.
3. Construction contracts
· ICDS does not permit the accounting under completion contract method, and mandates that only percentage of completion method should be applied for the recognition of revenue from rendering service or construction contracts. Provision of construction contract is difficult so, it is really hard to implement for smaller assessee.
· Pre-construction income in the nature of interest, dividend and capital gains shall not be net off from the cost of construction and hence continue to tax as an income in accordance with Income tax provisions.
· Recognition of contract revenue at early stage to the extent of contract cost incurred only when the contract outcome cannot reliably estimate. But early stage shall not extend beyond of 25% of stage of completion. There is no such kind of provision present in AS-7.
· Losses incurred on a contract shall be allowed only in the proportion to a stage of construction completed. Future loss or expected loss shall not be allowed in ICDS, until unless those losses are actually incurred.
· Retention shall be taken revenue for computing revenue based on the percentage of completion method. Retention money cannot be income till the right to receive after the fulfillment of specified conditions.
4. Revenue Recognition
· There is not specific change is ICDS with regards to AS-9 except recognition of revenue until there is a reasonable certainty of ultimate collection.
· ICDS suggest that revenue from the rendering of service shall be recognised by the percentage of completion method. On the contrary, the requirement to apply this standard just recognition of revenue and with that associated expense of service transactions.
5. Tangible Fixed Assets
· Wordings of AS-10, Whenever the assets acquired in exchange of another assets or shares or any other securities then the value of asset recorded are lower of being
a) Fair market value of asset acquired; or
b) Fair market value of share or securities issued.
(Whichever is more clearly evident)
But in ICDS the concept is totally different, it tells that when the asset acquired then the value of asset acquired shall be its actual cost. The reason is simple behind logic; CBDT didn’t want that assessee will claim any extra depreciation by taking Fair market value of asset.
· Right now there, is no statutory requirement of maintaining fixed assets register (FAR) for non-corporate entities subjected to that they will not cover under tax audit. The necessity of maintenance of fixed asset register will just create the burden of cost to small entities.
ICDS-V clearly specifies the parameter to consider while maintaining the fixed assets register i.e. Description of assets, location of assets, actual cost subject to some adjustment and date of asset first put to use.
In its preamble ICDS clarify that ICDS is not subject to apply for the maintaining of books of accounts and fixed assets register is the part of books of accounts. Still is s matter of issue.
· ICDS is silent about treatment of revaluation of asset and disposal or its retirement and hence it is continue to be applied as per the act.
6. Government Grants
· Recognition of grant is based on the
a) the assessee shall comply conditions attached to that grant; and
b) the grant shall be received
In addition to the above, ICDS impose one more condition it i.e. recognition of grant shall not be postponed beyond the date of its actual receipt.
· AS-12, gives us two approaches for treatment of government grants (Deduction Approach and Deferred Income Approach). However, ICDS allows the deduction approach for treatment of grant for depreciable assets. In deduction approach, asset is recorded in books after net of government grant amount.
· Where the grant is related to non-depreciable assets, the treatment of its in AS is to transfer whole amount into capital reserve but in income computation standards the amount is considered as income and deferred in same period of over the cost of meeting such expenses.
7. Borrowing Cost
· Unlike the Accounting standard (AS) 16, Borrowing cost ICDS does not define any minimum period for its classification as a qualifying assets (with the exception of Inventories). ICDS includes both tangible and intangible asset as a qualifying without defining the substantial period.
· ICDS states that, in case of specific borrowing capitalization of borrowing cost should commence from the date of borrowing and in case of general borrowing, from the date of utilization of fund.
· ICDS is silent about the capitalization of borrowing cost even after active development of qualifying assets is interrupted. Hence, assessee can continue to capitalize the borrowing cost whether interruption is in control or not.
· In addition, under ICDS, income from temporary deployment of utilized borrowed fund would not be deducted from the borrowing cost to be capitalized. Rather it is treated as income.
· Formula of borrowing
8. Provision, contingent liabilities and contingent assets
· Contingent assets usually arise from unplanned events that give in rise in inflow of the economic benefits. AS-29 follows the concept of Prudence therefore, no early of income or gain until their realisation. But in case of ICDS, it overrides the concept of Prudence as per this ICDS the contingent assets and corresponding income should be recognised once the contingent assets the meets the criteria reasonably certainty for its inflow of economic benefits.
Again it is matter of litigation or further clarification about the concept of “Reasonable Certainty”.
· Onerous contract is being taken out of the ambit of Provision in ICDS.
ICDS is reality now and CBDT has taken certain step for the smooth implementation of IND-AS and try to reduce the litigation as far as they can, still there are some matter which needs clarification like whether tax auditor have to require to report on compliance of these standards, how standards separately disclosed in tax return and further changes shall be mandate in form 3CD for the disclosure requirement. While the standards setter have clarified that additional set of books not require for ICDS, there are several other records which needs to maintain.
In overall, the CG with CBDT will have to play highly pro-active role to provide the clarity on some terms of ICDS and minimize the potential areas of litigation.