Tax Accounting Standards (ICDS) - An Overview

What’s the need: It has been a discussion since two decades arguing that the Accounting Standards issued by the Institute of Chartered Accountants of India (ICAI) are so flexible that it’s easy for an assesse to avoid precise payment of income taxes by following a particular system, hence it’s in the first quadrant of importance and urgency matrix to standardize the computation methodologies under income tax Act. Well, it’s still debatable as some experts say it brings greater consistency and might try to reduce complexity and litigations, time will only tell!!

The Overall idea is to harmonize the Accounting Standards (AS) issued by ICAI with direct tax laws in India and come up with AS that needs to be adopted under section 145 (2) of the IT Act along with relevant notifications along with suggesting methods for determining book profits, MAT for initial years of migration to IFRS and to suggest appropriate amendments to the Act considering adoption of IFRS (IND AS).

Business Impact: Starting financial year 2015-16, Companies to follow ICDS (Income Computation and Disclosure Standards, also called as “Tax Accounting Standards”) for calculating and arrive at the fund transfer amount for the 1st Quarter advance tax payments. Does this mean the Assessee has to maintain two set of books one for tax and another in accordance with AS issued by ICAI (Ministry of Corporate Affairs notifying the converged IFRS (IND AS)? The answer is a resounding NO.

These standards have no say on the purpose of maintenance of books of account but will be applied for computing taxable income chargeable under heads “profits and gains of business or profession” or “income from other sources”. It was also mentioned in the guidelines that the winner will be the provisions of Income-tax Act, 1961 and not ICDS, if there arises a fight between the two, which is obvious. But for sure it’s an extra effort in terms of time and money to the business houses those who follow accrual (mercantile) system of accounting.

Devil and the divine in the details: CBDT (Central Board of Direct Taxes) has revamped the framework to figure out taxable business income to arrive taxes to be deposited to the government. There are 10 notified ICDS (out of proposed 12) to keep in mind w.e.f 1st April, 2015. All these efforts are to get the consistency between tax and accounting principles.

Move by CBDT is much needed when we India is already talking about implementing “IND AS or Converged IFRS.

Summarized list of ICDS (or TAS) are below:

1. Accounting Policies

2. Valuation of Inventories

3. Construction Contracts

4. Revenue recognition

5. Tangible fixed assets

6. Effects of changes in foreign exchange rates

7. Government grants

8. Securities

9. Borrowing costs

10. Provisions, Contingent liabilities & assets

11. Leases (not yet notified as on 1st April,2015)

12. Intangible assets (not yet notified as on 1st April, 2015)

Tax accounting experts feel these efforts may not completely eliminate the inconsistencies between IND AS (MCA) and TAS (CBDT) and could lead to potential litigations between assesse and the department, few instances can be different treatment or interpretations of the standards from both the ends and on the other hand Accounting standard – 22 “Accounting for taxes on income” will still have impact of identifying the book tax differences in creation of deferred tax asset or liabilities.

Thank You,

CA. Kiran Kumar Komaravolu