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India Inc faces taxing issues over IFRS
July, 01st 2010

As corporate India comes to terms with the complex new system of accounting standards, which it will have to adopt beginning April 1, it is vexed with two related issues that it has no control over taxation and the companies law.

As it is, the kaleidoscope of conflicting perspectives is complex enough to confound even the knowledgeable. For example, when you depreciate different components of an asset over varying useful lives and at different rates as mandated by the International Financial Reporting Standards (IFRS), as opposed to applying a single rate for the entire asset as is done today, will the depreciation load rise or decline? You have freehold land and haven't decided if it is for real estate development or your own office building is the land, then, an asset or an investment? If preference capital is to be treated as a loan, then is the dividend actually interest'?

Questions, hundreds of them, answers to which is more a matter of opinion than an established principle, are buzzing around the Indian accounting profession.

Yet, these appear mere pinpricks when you compared with the problems thrown up by aspects of taxation policy and the companies law.

Uncertainties

At a seminar on IFRS organised here by the Confederation of Indian Industry, experts rued that the authorities were yet to come out with a fundamental guideline as to whether from April 1 next year, the taxable profits will be computed according to existing Indian accounting standards or IFRS.

A committee has been formed comprising members from the Central Board of Direct Taxes and the Institute of Chartered Accountants of India. The committee will presumably first look into revenue implications for the Government rather than extend help to the corporate sector.

Beyond that nobody knows how the taxation regime will pan out I the IFRS era. The predominant view is that since only about a thousand companies will mandatorily migrate to IFRS on April 1 (see table), the Government will continue with the Indian GAAP (Generally Accepted Accounting Principles) for computing taxable profits.

If it is to be Indian standards for tax computation and IFRS for compliance with corporate legislation, it will be tough on accountants who will have to keep two separate books of accounts.

Yet, experts point out, it is not as simple as that. The Income-Tax Department being no spring chicken, the principal alarm in the corporate world is that the taxman will choose what suits him best, from Indian standards and IFRS, and you will end up with the worst of both worlds. A senior finance professional puts this succinctly: What is not income' today will become income', what is expenditure' will not be treated as expenditure.

For instance, under IFRS, preference capital is treated as a loan and you will charge preference dividend to Profit and Loss account, but the I-T Department will not let you call it expenditure'.

If you fair value' an asset (as opposed to the conservative cost method') and sell it, what will be the basis for calculating capital gains?

If you fair value your property, will the local municipal authorities not ask you to pay property tax on the basis of your own valuation?

Unless the haze of taxation clears first, there is bound to be chaos in the marketplace.

Balance sheets

Equally, the lack of alignment between the Companies law and IFRS has left the accountants nonplussed.

The familiar Schedule VI in which we are all used to reading the balance sheets will be (or ought to be) a relic in a few years because the format of presentation of the balance sheet under IFRS would be in according to a different prescription.

But the Companies Act will need to be amended to make way for a smarter presentation of financial statements than Schedule VI.

Leave aside the disconcerting fact that an overhaul of the Companies Act has been pending for nearly a decade and several avatars of the Companies Bill have come, and gone.

The current Bill does not seem to be in alignment with IFRS. Schedule VI is one example, but there are other issues, such as the classification of current and non-current assets.

Amid all this confusion, there seems to be one hope in the corporate world: That like the Companies Bill, the Direct Taxes Code, and a whole lot of other things, IFRS implementation will also get put off to a later date.

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