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New tax computation norms from FY16
January, 23rd 2015

A new set of norms for tax computation released by the government have addressed many concerns of the corporate India about the tax implications of a proposed shift to the corporate accounting based on fair value concept. But in many cases, it might reduce companies’ flexibility with regard to income/loss recognition in specific assessment years and impact timing of tax-related cash outflows.

The Central Board of Direct Taxes (CBDT) released the draft Income Computation and Disclosure Standards (ICDS) recently in the wake of the new mandatory accounting norms Ind AS, to be phased in effective April 1, 2016, beginning with large companies with R500 crore-plus net worth and their arms. Ind AS is compliant with the International Financial Reporting Standards (IFRS). The ICDS will prevail over both the existing accounting standards for corporates and other businesses and Ind AS so far as taxation is concerned.

According to sources, the Income Tax Act does not recognise the concept of materiality (which is one of the basic tenets of Ind AS) and so, the ICDS doesn’t endorse prudence as a fundamental assumption. Put simply, this means that the tax department would accelerate income recognition in some cases, irrespective of whether the gain/loss that are due have actually accrued. The result could be an early recognition of income and/or later recognition of expenditure.

For instance, real estate companies, which currently show income only after completion of projects, would require to adjust their tax outflows to a less flexible system where their incomes form milestone payments by home buyers are recognised more promptly than now. Similarly, companies that receive governments grants for economic activities committed by them in backward areas, will have to show these grants as capital receipts and pay tax accordingly.

Yet, tax experts don’t consider ICDS would have a major adverse impact on firms’ freedom when it comes reporting their income (derived from profits and gains of business or profession or “income from other sources). The apprehension is more about that prospect of tax authorities implementing the ICDS rather whimsically, and not about the norms themselves, they added.

Companies will have to compulsorily apply ICDS, the new set of 12 tax accounting standards from 2015-16. This is a significant departure from the current practice of making a few adjustments to the reported book profits of companies to calculate their tax liability.

“In many instances, ICDS would result in acceleration of recognition of income and as a result in the related tax payouts as well. ICDS does not have the concept of prudence, which is a fundamental concept in existing accounting standards. ICDS, for example, does not allow recognising anticipated or unrealised losses for tax purposes,” said Sai Venkateswaran, partner, KPMG.

While these changes may be beneficial for Revenue Department due to acceleration of their tax collections, companies might find this challenging to comply with, both from an efforts perspective as well from the timing of cash outflows, added Venkateswaran.

Banks such as SBI and ICICI with foreign branches will have to recognise currency conversion gains and losses for calculating the taxable income rather than showing them in the balance sheet.

Also, government grants received have to be recognised even if the receiving company is unable to fulfill any attached obligations. This is not required under the existing accounting standards of the Corporate Affairs Ministry.

Also, the option currently available to businesses of recognising losses immediately on signing an onerous (loss-making) contract is disallowed by the ICDS. Reporting of loss will be allowed under tax accounting norms only when actually incurred.

Dolphy D’souza, national leader, IFRS Services, EY, said that one of the reasons for postponing the implementation of IFRS-converged Ind-AS in India till 2016 was that they were driven towards meeting the requirements of investors and were not suitable to determine taxable profits.

“Thus a strong need was felt to separate accounting standards used for statutory reporting purposes and those that would be used to determine taxable income. This gap is now being filled with the issuance of Tax Accounting Standards,” said D’souza.

CBDT has given one month time for businesses to give their views so that the new norms can be implemented from next financial year onwards.

“The ICDS are an important step in India’s transition to Ind AS, since this would address concerns around the tax impact of new measurement techniques under Ind AS. By providing specific guidelines, ICDS are also an attempt to reduce litigation between comp
anies and the tax department,” said Jamil Khatri, Deputy Head of Audit & Global Head of Accounting Advisory, KPMG.

One area of such unforeseen impact of IFRS adoption is the liability to pay the 18.5% Minimum Alternate Tax (MAT) which would depend on the book profits reported. When bigger companies migrate to IFRS before smaller ones, book profits and hence the MAT liability would hit different segments of the corporate world differently. While the finance ministry intends to separately clarify whether the MAT liability of companies should be decided based on reported book profits from next year onwards, the new tax accounting standards has sought to reduce all the accounting alternatives available to companies that have a bearing on the tax outgo in a particular year, in favour of the exchequer.

Cost to company:

* Addresses Corporate India concerns over tax implications of a proposed shift to the corporate accounting based on fair value concept
* But in many cases, it might reduce companies’ flexibility with regard to income/loss recognition in specific assessment years and impact timing of tax-related cash outflows

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