Central Board of Direct Taxes (CBDT) and accounting rule-maker Institute of Chartered Accountants of India (ICAI) have jointly constituted a study group to identify and address direct tax issues that will affect convergence of Indias accounting standards with International Financial Reporting Standards (IFRS).
With IFRS convergence due for April 2011 and the government coming up with the new Direct Taxes Code (DTC), the suggestions of the study group finds relevance. Many provisions in the DTC need to be amended for a smooth transition to IFRS. The study group will soon send its recommendations to the government for consideration, said an official at the ICAI, who requested not to be named.
According to reports, the finance ministry is looking to introduce the DTC in the forthcoming budget session. Apart from many aspects that are being discussed, one aspect that will particularly come as a hurdle for IFRS convergence is towards tax treatment of mark-tomarket (MTM) provisioning on derivative transactions, he explained.
MTM or fair value accounting assigns a value to a position held in afinancial instrument based on the current fair market price for the financial instrument.
Jamil Khatri, ED, KPMG, says that there is an absence of clarity between IFRS and taxation aspect in the Indian context. There is need to consider the taxation impact of one time IFRS adjustments in the opening balance sheet.
For example, mark-to-market provision on derivatives. Whatever accounting changes are going to happen, which of these changes should flow through from tax deductibility perspective and which are the changes that require any special provision in direct taxes code as a disallowable or non- taxable item until realisation. This question has not been addressed, Mr Khatri had recently said at an IFRS conference.