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CBDT notifies 10 new standards for computation of taxable income
April, 07th 2015

The Central Board of Direct Taxes (CBDT) has overhauled the way income needs to be computed by businesses to calculate the income tax to be deposited with the exchequer.

The new framework for computation of taxable income has notified 10 income computation and disclosure standards (ICDS), with effect from April 1, 2015, which will bring greater consistency in the application of accounting principles, say accountancy and tax experts.

This CBDT move is also timely, as it will facilitate the adoption of Ind AS (IFRS converged standards).

As against 12 proposed standards, the CBDT has now notified 10, covering accounting policies, valuation of inventories, construction contracts, revenue recognition, tangible fixed assets, effects of changes in foreign exchange rates, government grants, securities, borrowing costs, and provisions, contingent liabilities and contingent assets.

The standards on leases and intangible assets have, however, not been notified.

However, experts have mixed views on whether the notification will minimise litigation.

Mixed response

G Ramaswamy, former CA institute President, said the CBDT’s move was good from the tax collection point of view as it would recognise proper income without differentiating between corporate and non-corporate assessees.

This would set to rest all controversies around computation of income for income tax purposes, Ramaswamy told BusinessLine .

He felt the ICDS regime should also be made applicable to not-for-profit entities.

Dolphy D’Souza, Partner with an India member firm of EY Global, said the notification was imperative to ensure smooth implementation of Ind AS and, therefore, should have maintained a tax-neutral position.

Unfortunately, the ICDSs are not tax-neutral vis-à-vis the current Indian Generally Accepted Accounting Principles (GAAP) and tax practices, and may lead to litigation, D’Souza said.

For example, based on AS 7 Construction Contracts, the current practice is to recognise any expected loss on a construction contract as an expense immediately. In contrast, ICDS will require expected losses to be provided for using the percentage of completion method. The tax flow may be higher on this count, he added.

Sai Venkateshwaran, India-Head for Accounting Advisory Services, KPMG in India, said the adoption of ICDS will significantly alter the way companies compute their taxable income, as many concepts from existing Indian GAAP have been modified.

This will have an immediate impact on companies, which will need to take this into account while paying their advance taxes for the first quarter of 2015-16, he said.

Significant changes

Sumit Seth, Partner, Price Waterhouse, said the introduction of ICDS could result in significant changes in the areas of capitalisation of borrowing costs, derivative contracts, foreign currency transactions and revenue recognition, to name a few.

Ind AS impact

Companies adopting the IFRS-converged Ind AS will have to closely evaluate its implications, including interaction with Ind AS.

For example, ICDS mentions that a marked to market loss or an expected loss shall not be recognised. However it does not address situations involving recognition of marked to market gains.

This is particularly important in the context of Ind AS, which requires recognition of both unrealised losses and gains on items, such as derivatives, equity investments etc, he said.

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