)
The Central Board of Direct Taxes (CBDT), Department of Revenue, recently operationalised a new framework for computation of income, by notifying Vide Notification No. SO 892(E) dated 31-3-2015 the 'Income Computation and Disclosure Standards' (ICDS) from April 1, 2015.
The standards have been introduced to meet long standing objective for harmonising Accounting Standards (AS) issued by the ICAI (Institute of Chartered Accountants) of India with that of the Income-tax Act, 1961 (Act), for consistency in computation of taxable income. Steps to achieve such harmonisation began in 1995 when by way of a subordinate legislation such powers were conferred on the CBDT under section 145 Under section 145 of the Act, the CG is empowered to notify accounting standards to notify independent accounting standards.
The first two standards relating to 'Disclosure of Accounting Policies' and 'Disclosure of Prior Period and Extraordinary Items and Changes in Accounting Policies' notified by the CBDT (in 1996), left limited impact and hence consecutive committees were constituted to review and recommend modality of harmonising such standards. That said successive verdicts of the Apex Court on a host of disputes concerning income and expenditure recognition, characterisation of expenditure between revenue and capital and computation of book profits for the purpose of Minimum Alternate Tax (MAT) emphasised upon the prominence of AS, as notified by the government in pursuance to ICAI standards.
With the recent notification, the question that arises is, if such uniformity and consistency will reduce tax litigation besides of course consistency and avoiding maintaining separate accounting records for statutory reporting and tax purposes.
Immediate upshot
First, the standards are applicable for all tax payers following only mercantile system of accounting and to income chargeable under the head 'profits and gains of business or profession' and 'income from other sources'. Second, tax computation as per the standards need to be factored for computing advance tax installments for the current financial year 2015-16. For most tax payers who run their accounting on ERP systems, capturing the difference between the Income Tax Act and current AS is crucial. I wonder if the government could have given a year as breathing time for tax payers to adjust their systems or at least make its applicability optional for the first few years.
Is ICDS really a panacea?
While the objective of ICDS is to reduce litigation and achieve harmonisation, it has the potential to raise disputes, particularly, in the present form and it is hoped that the government articulates transition challenges that tax payers are expected to face. There are fundamental changes in the manner of recognising income and expenditure as per ICDS since many concepts, including the concept of accrual (under the Act) as interpreted by courts, seem to be at variance with ICDS.
As a general rule, since ICDS is now an integral part of the Income Tax law, it has the status of a subordinate legislation. In other words, it cannot override other statutory provisions and judicial principles laid down by courts. For instance, general principles laid down by courts say in the context of interpretation of law concerning 'deductibility of expenditure' shall remain unaffected and if that be the case, ICDS will achieve limited objective.
Since ICDS does not overrule the provisions of the Act, the standards which are at variance with the Act will become redundant or it will give rise to interpretational disputes. To me, the underlying philosophy of ICDS appears to be acceleration of recognition of income and deferral of recognition of expenses.
While this may bring uniformity in taxation and bring tax revenues for the Government, what will effectively be achieved is only a timing issue. In select cases, the tax computation as per new standards is likely to result in double taxation, particularly in context of MAT computation.
The requirement of substance over form sounds like a mini GAAR and is likely to lead to disputes on characterisation. The ICDS specifically exempts tax payers from maintenance of separate books of account for tax purposes.
Difficult to fathom though, given the divergence of ICDS with current AS and IFRS (International Financial Reporting Standards) which are in the midst of convergence with Indian AS, it seems tax payers will continue to maintain multiple sets of books. In the absence of a separate set of books, preparation of reconciliation between taxable income and financial books will become a herculean task, ignoring the effort required to explain such reconciliation to field officers at the assessment stage.
Whilst the intent is noble to bring uniformity in computation of income and reduce litigation, it seems that guidance to Revenue officials and timely clarifications by way of FAQs on conflict areas is vital for the success of ICDS.
This is particularly important since the law clearly empowers officers to complete an ex-parte assessment, if tax payers are non-compliant with ICDS.
The author is managing partner, BMR Legal. Views are personal.
(Contributions by Sunil Choudhary, Parul Jain & Kabir Handa)
