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New tax accounting standards to reduce litigation soon
September, 25th 2012

From 2012-2013 onwards, companies may have to file their income-tax return as per the standards laid down by the Central Board of Direct Taxes (CBDT). The new standards will reduce the discretion which is currently available with the taxpayers under the standards prescribed by the Institute of Chartered Accountants of India (ICAI), thus bringing down chances of litigation with the tax department.

The Tax Accounting Standards, however, will be applicable only to computation of taxable income under the Income Tax Act. A CBDT committee, in its draft report submitted recently, has suggested that separate books of account are not required to be maintained under the Tax Accounting Standards, thus reducing the compliance burden on businesses.

Some changes have been introduced in the accounting standards. There will be a system of computing income by providing for specific treatments. ICAI standards provide for certain options. Now we are saying you will have to do it in a particular manner for computation of income, a finance ministry official, who did not wish to be identified, told Business Standard.

The official clarified the new standards would not put extra burden on taxpayers as they merely addressed the issue of too many alternatives under the ICAI standards.For example, there is lot of litigation about treatment of government grant. The CBDT panel has proposed that it should be treated as income and if it is treated as capital than one should account for depreciable asset.

The committee has adopted as many as seven out of 28 standards issued by ICAI. Its report is likely to be released soon for inviting public comments. After receiving the feedback from all stakeholders, the finance ministry may notify the standards to make them applicable from the next financial year.

Computation of income is a major area of disputes between the tax department and the taxpayers. About 2 lakh crore of the amount is locked up in appeals. The tax accounting standards are expected to bring certainty in treatment of various items. The standards may affect sectors such as real estate, construction, and treatment of contracts, government grants, and foreign exchange treatment.

A committee of experts from the government and professionals was constituted by the CBDT in December 2010 to suggest accounting standards for tax purposes that could be notified under section 145 of the Income Tax Act 1961. The Committee had submitted its interim report in August 2011.

At present, Section 145 of the Income Tax Act provides that the method of accounting for computation of income under the head Profits and gains of business or profession and Income from other sources can either be the cash or mercantile system of accounting. Since tax accounting standards are based on the mercantile system of accounting, they will not be applicable to the taxpayers following cash system of accounting. They standards may also provide that in case of a conflict between the Income Tax Act and the tax accounting standards, the law would prevail.

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