CBDT panel moots tax accounting standard

The new standards are different from accounting standards formulated by ICAI in a number of ways

Companies may soon have to file their income tax return as per the standards laid down by the Income Tax department.

The tax accounting standards (TAS), recommended by a panel of Central Board of Direct Taxes, are different from accounting standards formulated by ICAI in a number of ways.

In its final report, the panel recommended TAS that says notional losses will not be allowed to be deducted from income for the tax purposes, a norm which is different from accounting standards.

Accounting standard (AS 1) allows recognition of expected losses. However, the same standard does not recognise anticipated profits.

Now the CBDT committee said that since accounting standard amounts to differential treatment for recognition of income and losses, the tax accounting norms will not recognise expected losses or mark-to-market losses.

The same rule will apply for forward exchange or similar contracts entered into for trading or speculation purposes. Accounting standard (AS-11) says that these contracts be mark-to-market at each balance sheet date and the resultant exchange differences should be recorded in profit or loss.

Since such mark-to-market gains or losses are unrealised in nature, the CBDT committee recommended that tax accounting standards should recognise all gains or losses on such contracts only on settlement.

According to recommendations, TAS will also deal with securities held as stock-in-trade for tax purposes, which is not recognized by accounting standard (AS-13).

Securities held as stock-in-trade draws higher tax at the rate of 30 per cent, against 15 per cent long term capital gains tax on listed securities held as investment.

This is the current practice as well, but TAS has recognized this to give greater clarity, an analyst explained.

The proposed standards by the panel are aimed at bringing down discretion currently available with taxpayers under the standards prescribed by the Institute of Chartered Accountants of India (ICAI).

A high-level panel suggested framing of TAS for computing precise income of real estate developers and for share-based payments to avoid tax litigations.

However, TAS notified under the Income Tax Act would be made applicable only to the computation of taxable income and a taxpayer would not be required to maintain separate books of accounts for ICAI and income tax standards, thus reducing the compliance burden on businesses.

The CBDT committee examined all the 31 standards issued by the ICAI and recommended notification of standards on 14 issues under the I-T Act.

The CBDT expects this may bring down chances of litigation with the tax department. Amendments to the I-T Act will be required to enable issuance of tax accounting standards.

The tax accounting standards are expected to bring certainty in treatment of various items. The standards affect sectors such as real estate, construction, and treatment of contracts, government grants, foreign exchange treatment, securities, leases, intangible assets and borrowing costs.

The committee recommended that the TAS should be made applicable to all taxpayers for bringing certainty on the issues covered by it and that in case of conflict between the provisions of the I-T Act and TAS, the Act shall prevail over the standards.

Seven standards have been adopted as it is from standards framed by accounting regulator ICAI.

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 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.