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In the year 2010, the Central Board of Direct taxes (“CBDT”) constituted a committee comprising of departmental officers and professionals to suggest Tax Accounting Standards (“TAS”) for the purpose of notification under Section 145(2) of the Income tax Act, 1961 (“the Act”). The CBDT intended to reduce litigation around contentious taxing issues. The committee submitted its first interim report in August 2012 and placed the report for public comments.
The CBDT, in its wisdom, replaced the proposed TAS with the now proposed Income Computation and Disclosure Standards (“ICDS”) for computation of taxable income rather than a standard for the purposes of accounting. This aspect has also been unequivocally clarified in the standards itself. This fundamental change puts the proposed standards in tax computation domain and seeks to remove confusion over the requirement to maintain separate set of books of accounts.
The proposed ICDS, though renamed, are essentially a revised version of TAS. The new draft, apart from prescribing the standard on accounting policies, which require adherence to fundamental accounting assumption of going concern, consistency and accrual for tax computation purposes also has 11 ICDS, which cover valuation of inventory, construction contracts, revenue recognition, tangible fixed assets, effects of changes in foreign exchange rates, government grants, securities, borrowing costs, leases, intangible assets, provisions, contingent liabilities and contingent assets.
The introduction of ICDS is intended to bring uniformity in the tax positions being espoused by taxpayers. This should result in avoidance of litigation on some of the debatable tax issues. However, the standard itself makes this position subjective by stating that in case of conflict between the provisions of the Act and ICDS, the provisions of the Act shall prevail to that extent. Thus, it would give taxpayers and Courts leeway to interpret the statute independent of the proposed standards.
ICDS will be introduced under section 145 of the Act, which provides for the method of accounting to be followed by a taxpayer. The section also empowers the Central Government to notify the accounting standards to be followed. While on one hand by renaming TAS to ICDS, the government seems to have conceded that the proposed standards are not for the purpose of accounting but for computation of taxable income, on the other hand it still attempts to introduce ICDS through Section 145, which can only prescribe method of accounting.
Further, introduction of ICDS through section 145 can also lead to harassment to the taxpayers as section 145(3) provides for best judgment assessment under section 144, if the income has not been computed in accordance with the ICDS. Any attempt by a taxpayer to interpret provision of the Act in divergence with ICDS can lead to an ex-parte best judgment assessment. This further amplifies the fundamental flaw of introducing ICDS through Section 145, which was intended for introduction of accounting standards not for guidelines for computation of taxable income, as is the current case.
On the accounting policy front, it has been proposed that the treatment and presentation of transactions and events shall be governed by their substance and not merely by the legal form. The issue of substance over legal form has been subject matter of extensive legal debate in tax disputes. While introduction of ‘general anti avoidance rules’ was expected to take care of this, use of this alternate route to push the agenda of substance over form is likely to lead to more litigation.
The ICDS provides transitional provisions as on 1 April 2015. This might require an extensive exercise to be undertaken by the taxpayers to synchronise their existing policies with the proposed standards. Also, the proposed ICDS could be quite different from standards followed for preparation of financial statements. Though, it has been clarified that the taxpayers would be required to maintain only one set of accounts, in practice, the difference in accounting policies would make computation of taxable income an arduous exercise.
It is pertinent to note that the Ind AS have been notified by the Ministry of Corporate Affairs with effect from 1 April 2016 (1 April 2017 in some cases). Ind AS has introduced drastic changes in the method of accounting to be followed by entities while drawing their books of accounts. It would be interesting to see how ICDS aligns with the Ind AS.
Further, it is not clear where the disclosures required under ICDS are to be made. Whether tax auditor would be required to report compliance (as was the case in case of TAS) or a separate statement of these disclosures would be required to be made with the tax return. Whichever way disclosure is to be made, implementation of ICDS would definitely add to the administrative burden of taxpayers. In the era of convergence and promise for ease of doing business, prescription of separate standards by different regulatory bodies is not a way to go!
Indian Accounting Standards (abbreviated as Ind AS) are a set of accounting standards notified by the Ministry of Corporate Affairs which are converged with International Financial Reporting Standards (IFRS).
This article appeared in ‘The Firm’ on CNBC TV18 on 28th January, 2015.