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New tax accounting standards may reduce leeway for infrastructure companies
May, 16th 2017

Tax officials and industry experts will discuss new tax accounting standards for infrastructure companies in July, a person aware of the matter said. The new standards are expected to reduce the discretion these companies use in deciding how and when they recognize revenue from their projects.

Officials representing the income-tax department, accounting body the Institute of Chartered Accountants of India (ICAI) and outside experts will discuss the norms and subsequently seek comments from public, the person mentioned above said on condition of anonymity.

The proposed Income Computation and Disclosure Standards (ICDS) for ‘build, operate and transfer’ (BOT) projects will force many companies to recognize revenue earlier and pay tax earlier as well.

Given the rebound in highway development and expected investments in the infrastructure sector, this could result in an immediate boost to tax receipts. However, ICDS will only curtail the flexibility of developers to defer taxes, and not increase the actual tax outgo.

“At the moment, there is no accounting standard for BOT, only a guidance note prepared by ICAI is available, resulting in companies adopting divergent accounting policies. The main idea is to give clarity to taxpayers in the absence of a standard,” said the person quoted above, adding that the diversity in reporting needs to be addressed.

The move is part of the government’s strategy to insulate taxation from the book profits that companies prepare for the benefit of shareholders and regulators under provisions of the Companies Act.

Finance minister Arun Jaitley said on 1 April that India requires about Rs43 trillion ($646 billion) of investment in infrastructure in the next five years.

At present, in a BOT or a build, own, operate and transfer (BOOT) project of 10 or 20 years’ tenure in which revenue is earned over the life of the project, developers have the flexibility to recognize revenue over a period of time, offering them a lot more accounting flexibility than in other sectors, said Riaz Thingna, director, Grand Thornton Advisory Pvt. Ltd.

“Each company may adopt a different method as per their requirement. Greater clarity on revenue recognition in these highly capital-intensive projects will help investors plan and manage their cash flows better. Also, ICDS is likely to accelerate revenue recognition in the case of many projects,” said Thingna.

Infrastructure companies’ financial statements on revenue recognition vary widely also because of the two different accounting requirements for the industry mandated by the company law.

Companies Act requires listed entities and unlisted ones with Rs500 crore or more of net worth and their associates to follow Ind AS, a set of accounting standards based on the ‘fair value’ concept, from 2016-17. These standards make financial statements reflect the market value of assets and liabilities at a given point in time—something that is helpful for investors, but not to the tax department as gains or losses for tax purposes do not arise merely because of price fluctuation in assets held, where no transaction takes place.

Smaller companies follow Indian Generally Accepted Accounting Principles (GAAP), based on the principle of prudence. Infrastructure assets are at present allowed under existing accounting norms to be classified either as capital assets, financial assets or as intangible assets that guarantee a right over a future stream of revenue.

The proposed tax accounting standards will make sure that no matter which accounting standard companies follow and what flexibility they exercise, the tax outgo for projects of similar nature will be the same across the industry.

Sai Venkateswaran, partner and head of accounting advisory services KPMG India, said ICDS could potentially impact the timing of the tax outgo for infrastructure firms and the manner in which assets and related income are characterized, while it may not have a significant impact on the total quantum of profits recognized over the life of the a project.

Venkateswaran said firms following Ind AS have already started recognizing revenue from service concession arrangements in line with global practices that are adopted in Ind AS. (BOT projects are considered to be a service rendered to government).

So far, the tax department has notified 10 different standards under ICDS from fiscal year 2016-17.

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