The migration of the accounting standards for corporate India to the International Financial Reporting Standards (IFRS) platform has created a challenge for the revenue department at the Centre. The Direct Taxes Code written by the finance ministry and expected to become law in 2010-11 is in several instances incongruent with the new global accounting standards.
The government is therefore taking a keen look at the inconsistencies to ensure companies do not have to develop two parallel accounts to comply with both. The government has mandated the Institute of Chartered Accountants of India and the Central Board of Direct Taxes to conduct a fine-toothed comb search of the tax code to sort out these inconsistencies, especially those relating to the treatment of profit and booking of losses in derivative trading.
In the interval, the finance ministry will keep the tax provisions for these subjects unchanged. For income-tax payers, including companies and even partnerships, this will come as a big relief.
Since the time available with the government before the Budgets tabling in Parliament on February 26 is short, major changes to the tax treatment could be made thereafter.
In the treatment of exemptions under direct tax, for instance, the code says deductions that exist under the existing Income-Tax Act via sections 80IA through 80IE and 80JJA would continue to be valid. But the IFRS treatment requires more disclosure in such cases. So Budget 2010-11 is likely to retain status quo on them.
That could also mean the effective corporate tax rate will continue to be 20% after the exemptions, though the card rate is 30%. If that happens, it will run counter to the finance ministrys original plan to incorporate the code in the form of an Act through the Finance Bill in Budget 2010-11.
The code is slated to become operational from April 1, 2011. So, the income of companies that flow into their books from April 2010 should ideally be taxed according to the provisions of the code.
The stakes are therefore considerable. The finance ministry is gunning for a modern tax system that stands up to the strictest international scrutiny. This has become necessary as large swathes of multinationals make India their base. Since the finance ministry is also planning to introduce another major change in tax laws--the goods & services tax--in 2010-11, it is necessary to ensure that companies have time to incorporate both in their books, even as they alter their accounting standards from the mostly GAAP-compliant format to IFRS. Differences in the tax code with IFRS standards make the task more complex.
Tax experts like Jamil Khatri, head of accounting advisory services at consultancy firm KPMG, favours an incremental approach. The changes need not be made at one go, as the finance ministry has one more Budget to cover it, he said. Changing too many provisions in the Finance Bill now might need a number of amendments to make them IFRS congruent later, he added.
Ernst & Young partner for tax and regulatory services Ganesh Raj also believes that since the ministry of corporate affairs plans to lay down a road map for IFRS convergence, everything else should follow thereafter.