If you have heard the term “tax accounting standard”, perhaps you should not worry what Income Computation and Disclosure Standards are. They are the new name for tax accounting standards and this time, more in number. Let’s go back in history and understand their true essence.
The concept of Income Computation and Disclosure Standards stems from section 145 of Income Tax Act, 1961.
Section 145 (1) requires assessees to compute income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” in accordance with either cash or mercantile system of accounting regularly employed by them.
In this context, it adds further through sub-section 2 that the Central Government may notify in the Official Gazette from time to time accounting standards to be followed by any class of assessees or in respect of any class of income.”
Accordingly two accounting standards were notified:
1. Disclosure of Accounting Policies
2. Disclosure of prior period and extraordinary items and changes in accounting policies.
Finance Act, 2014 amended Section 145(2) to substitute “accounting standards” with “Income Computation and Disclosure standards (ICDS)”.
On 31 March 2015, by virtue of notification no 32/2015, the Central Board of Direct Taxes (“CBDT”) notified 10 ICDSs which will come into effect from 1 April 2015 and shall accordingly apply for assessment year 2016-17 onwards. The implementation was however deferred by one year to Assessment Year (AY) 2017-18 (Financial Year (FY) 2016-17) via CBDT notification No 87/2016 dated 29.09.2016.
Now the question arises what ICDS are all about?
ICDSs: Things to know
Summing up the inferences from The Preamble to all ICDSs, notification notifying them as well as Section 145 of Income Tax Act, we conclude that:
- ICDSs are a set of standards in various areas for computation of taxable income
- They are meant to be followed to compute income chargeable under the heads “Profits and Gains of Business or Profession” and/or “Income from other sources”.
- They apply to the assessees following the “mercantile system” of accounting.
- They are to be followed by all assessees satisfying above criteria be it an individual, partnership, AOP or a Company, without any monetary limit.
- Individuals and HUFs not covered under Section 44 AB are not required to comply with ICDS.
- The method of accounting prescribed in ICDSs is mandatory.
- It has been specifically stated in the Preamble to all the ICDSs that they are only for income computation and not for maintenance of books of account.
- ICDS shall not be applicable to computation of book profit u/s 115JB of the Act.
That’s quite simple and self-explanatory. Now let’s have a look at the ICDSs notified.
List of ICDSs
Out of 14 draft ICDS which were drafted by the committee, only 10 were notified.
We have presented here the ten ICDS notified u/s 145(2) of the Act and the corresponding AS issued by ICAI and IND AS as notified under the companies Act, 2013, are as under:
|(ii)||Valuation of Inventories||2||2||2|
|(v)||Tangible Fixed assets||5||10||16|
|(vi)||Effects of changes in foreign exchange rates||6||11||21|
|(x)||Provisions, Contingent Liabilities and Contingent assets||10||29||37|
The 4 ICDS which were not notified and which can be notified going forward are:
- Events occurring after the previous year
- Prior period expense
- Intangible Assets
Further, the ICDS covering the following areas were recommended by the committee for notification:
- Share based payment
- Revenue recognition by real estate developers
- Service Concession Arrangements (example: Built, Operate, Transfer Arrangements)
- Exploration for and evaluation of mineral resources.
Now take an example.
A provision for any tax, duty, cess or fee etc. is made and the same is in accordance with any ICDS. But deduction will not be allowable unless actual payment is made as provided in Section 43B of the Act. What is the position of law on this conflict?
The preamble to all ICDSs answers this question. Take a look.
Conflict between Act and ICDSs
The Preamble to ICDSs provides that in case of conflicts between the provisions of the Act and ICDS, Act would prevail. However, in case the Act is silent or ambiguous, the interplay between ICDS and existing jurisprudence needs to be evaluated.
Since ICDS applies to prospective income computation for tax purposes, clarity is sought whether ICDS impacts even existing litigation.
Areas of deviation
Now we move on to the implications of ICDS. On analysis of requirements of ICDS with corresponding accounting standards, we have come across following deviations:
- Concept of prudence derecognized.
- Expected losses or mark-to-market (MTM) losses will not be recognized unless permitted by any specific ICDS. Provisions silent in relation to MTM gains
- Standard costing method not
- Inventory of service providers to be valued at lower of cost or NRV
- ICDS is applicable to all open construction contract as on 31 March 2016
- The service sector will mandatorily have to adopt Percentage of Completion Method (POCM) for revenue recognition
- Fair value of the asset given in exchange has no relevance.
- Only Forward Contracts and Foreign Currency Options (Forex derivatives) are covered by ICDS
- Introduction of new formula for capitalization of borrowing costs in case of general purpose borrowings
- Different dates for capitalization of specific and general borrowings.
- Capital approach for recognition of government grants derecognized.
- Recognition of provisions and contingent assets will be considered if outflow/inflow of economic resources is considered reasonably certain
We will be covering detailed comparison between IGAAP/Ind AS and ICDS in our forthcoming article on www.taxingtax.com .
ICDS do have Transition Provisions
As the ten ICDS are introduced for the first time to be made applicable from FY 2016-17, each ICDS (Except ICDS on securities) contains transition provisions for effective adoption of the same.
Income, expense, loss or provision existing or entered into on or after 01-04-2016 are to be recognized as per ICDS. However Income, expense, loss or provision, if any, recognized before 31-03-2016 shall be taken into account for recognizing the same for the period commencing on 01-04-2016 to avoid double taxation/non-taxation in pre and post ICDS period.
Each ICDS have certain disclosure requirements to be fulfilled which are very well mentioned beneath each ICDS.
However, ICDS is silent about where such information needs to be disclosed.
Vide notification no 88/2016 dated 29.09.2016, clause 13 of Form 3 CD (Tax audit report) has been modified to report ICDS adjustments as well as disclosure requirements.
The notification can be accessed using following link:
An illustrative presentation of computation of income after introduction of ICDS:
Non-compliance with ICDSs
Section 145(3) of Income Tax Act provides that the Assessing Officer (AO) may make an assessment in the manner provided in section 144 (better known as best judgement assessment ) where income has not been computed in accordance with the standards notified under sub-section (2).
Therefore, every assesse is required to consider the potential impact while estimating advance tax liability for FY 16-17. Non-compliance of ICDS will result in best judgement assessment by tax authorities.
1. The preamble to each ICDS states that ICDS are not applicable to the maintenance of book of accounts.
However, a system and a process is required in place to capture the relevant information required by ICDS as ICDS are not in alignment with the financial reporting framework. Given that, the ICDS will mandate separate set of records in a form of reconciliations which will lead to additional compliance and extra cost.
2. One major issue with ICDS is that they have widened the gap between accounting profits and the taxable profits giving rise to timing differences and the creation of deferred tax items. As a result, an entity will have to keep a proper track of deferred tax item.
3. The preamble specifies that ICDS cannot override Act. But there is no answer so far to the question whether tax position as per judicial precedents based on the interpretations of the Act will still prevail over the ICDS or not.
Hope you find the article useful. As mentioned earlier, we will be covering detailed comparison between IGAAP/Ind AS and ICDS in our forthcoming article on www.taxingtax.com . Stay tuned.