INCOME COMPUTATION AND DISCLOSURE STANDARDS [ICDS]
Draft in January 2015 by-
- Govt. of India
- Ministry of Finance
- Dept. of Revenue
- Central Board of Direct Taxes
This draft includes:-
- Accounting Policies
- Valuation of Inventories
- Construction Contracts
- Revenue Recognition
- Tangible Fixed Assets
- The Effects of Changes in Foreign Exchange Rates
- Government Grants
- Securities
- Borrowing Costs
- Leases
- Intangible Assets
- Provisions, Contingent Liabilities and Contingent Assets
The Central Government (CG) recently notified 10 Income Tax Computation & Disclosure Standards (ICDS) effective financial year 2015–16. This will affect the compliance practice of all taxpayers following the mercantile system of accounting for computing income chargeable to income tax under the heads:
- Profits and gains of business or profession or
- Income from other sources
The introduction of ICDS will help bring increased consistency in computation and reporting of taxable income, reduce litigation and minimize the alternatives provided by the existing Accounting Standards issued by the Institute of Chartered Accountants of India.
Given that this is the first year of applicability, there could be transitional concerns on income computation, as well as disclosure under the ICDS vis-à-vis current established practices. Differences in the two practices could have significant cash and tax impact (including risk of a Best Judgement assessment in case of non-compliance). It is critical for all stakeholders to understand the applicability of new tax standards and its various practical application issues.
Effective April 1, 2015 all taxpayers following mercantile system of accounting are required to follow the ten Income Computation and Disclosure Standards (“ICDS”) notified by the Central Government on March 31, 2015. ICDS prescribe the accounting standards that need to be followed for computing income chargeable to tax under the head “Profits and gains of business or profession” and “Income from other sources” under the Income-tax Act 1961 (“the Act”). The stated objective is to bring consistency in computation of income and reduce potential litigation.
The stated intent behind ICDS is noble but the issue is whether the intent will be achieved. The tax officers are not trained accountants and it may be a challenge for them as well as taxpayers to grapple with accounting concepts and complex situations to achieve agreement on the treatment during assessments. The confusion will increase with Ind AS getting implemented from next year for financial accounting as the gap between ICDS and financial accounting standards will further increase substantially. Taxpayers are already finding it hard to grapple with the shift in basis of financial accounting. One wonders whether the intent of ICDS could not have been achieved by carrying out a few amendments in the Act itself which would have been easier to implement. As of now, the taxpayers need to reconcile to the new challenge.
ICDS can be said as ‘a new paradigm for computing taxable income’ and for that what you need to consider is the adoption of ICDS could significantly alter the way companies compute their taxable income, as many of the concepts from existing AS have been modified. These ICDS have also been developed with a view to minimizing tax related disputes by bringing grater consistency in the application of accounting principles governing the computation of income.
ICDS in general do not have prudence as a fundamental assumption, and accordingly in several situations this would result in earlier recognition of income or gains or later recognition of expenses or losses as compared to that under the accounting standards; this would potentially have a direct impact on the timing of tax related cash outflows. Thus, there several areas which differ from the current accounting and computation practices followed under existing AS which would require careful consideration.
ICDSs are expected to fill up some gaps that existed in the current taxation set up by bringing in consistency and clarity in computation of taxable of income and providing stability in tax treatments of various items. ICDSs also address the significant issue relating to taxability of assessees when companies in India move their financial reporting to Indian Accounting Standards (Ind-AS) that are converged with International Financial Reporting Standards (IFRS) in a phased manner comencing 1 April 2015.