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The finance ministry has proposed standards for disclosing and computing of income, for the purpose of levying tax on companies. The draft, among other matters, provides for recognising segment-wise income for works spread over a period of time.
According to the draft Tax Accounting Standards, posted by the Central Board of Direct Taxes (CBDT) on the ministry’s website for comment, revenue for works spread over a period of time must be advance if a segment of the work is completed in a year, even if revenues have not been realised. This will make tax liabilities on these works coming to the exchequer much in advance.
For instance, if the construction work is spread over five years, the segment completed in a particular year would be taken into account for tax purposes. The company will have to disclose income from that work, even if it has not invoiced that segment.
“The requirements of this Income Computation and Disclosure Standard shall be applied separately to each construction contract,” says the draft.
It is the same case for services. If a segment of service is rendered in a particular year, revenue from that will have to be disclosed even if the payment has not come.
Though companies need not keep separate account books for the purpose of disclosing these incomes to the income tax (I-T) department, the work load would increase, tax experts have warned. This is so because companies currently make account books in accordance with accounting standards. Now, companies will have to adjust their income separately to disclose it to the I-T department.
“This will complicate the tax filing for firms. This would increase the work load on them, even if no separate accounting book has to be kept for tax purposes,” said Neeru Ahuja, tax partner with Deloitte India.
In the current accounting standards, there is an option that the revenues from the works which are spread over the years could be disclosed to the authorities in a year when the works are complete.
Vikas Vasal, partner, KPMG in India, said the premise of the Tax Accounting Standards is to bring consistency in the tax positions adopted by companies on some important issues and to ensure adequate disclosure of these. The aim, he said, is to avoid litigation on some of the contentious issues, by bringing in clarity and mandatory disclosure.
