Friday 2 November 2012

Tax Accounting Standards

14 Tax Accounting Standards recommended for computation of taxable income under the Income-tax Act, 1961

The Accounting Standard Committee (“the Committee”) constituted by the CBDT[1] in December 2010 has submitted its final report and recommended the adoption of 14 ‘Tax Accounting Standards’ (“TAS”) for computing income under the provisions of the Income-tax Act, 1961 (“Act”) in an objective and precise manner.  The recommendations are open for public debate and comments till November 26, 2012. 

The Act[2] empowers the Central Government to notify accounting standards to be followed by any class of taxpayers or for any class of income. The Act also requires income under the head “Profits and gains of business or profession” or “Income from other sources” to be computed in accordance with either cash or mercantile system of accounting regularly followed by the taxpayer.   Only accounting standards relating to disclosure/ change of accounting policies and disclosure of prior period and extraordinary items have been notified under the Act so far.   

Purpose of the Committee

The Ministry of Corporate Affairs has notified 28 accounting standards, based on standards issued by the Institute of Chartered Accountants of India (“ICAI”) required to be followed by companies in preparing their financial statements and the Government has expressed its intention to achieve convergence with the International Financial Reporting Standards (IFRS). Also, litigation under the Act has continued in absence of any certainty on accounting related issues.   With this backdrop, the Committee was set up to give its recommendations on:

·          Harmonization of accounting standards issued by the ICAI with the provisions of the Act;

·          The manner of computing book profit for the purpose of MAT[3] in light of intended convergence  to IFRS; and

·          Appropriate amendments to the Act in view of such convergence.

Recommendations of the Committee

Given the present fluidity and uncertainty around convergence with IFRS and since computation of book profit for MAT purposes would also be impacted by such convergence, the Committee has focused its recommendations only on harmonization of TAS with the provisions of the Act.  The key recommendations are:

·          To reduce litigation, minimize alternatives and achieve certainty, 14 TAS[4]  should be notified under the Act.  Drafts of such TAS have been framed by the Committee.  The accounting standards of ICAI which do not impact computation of total income or in respect of which specific provisions already exist in the Act have therefore, not been recommended by the Committee. Similarly, TAS have not been recommended in respect of accounting standards that are not yet mandatory like those relating to financial instruments.

·          TAS to be applicable only for computation of income and separate books of accounts should not be required to be maintained.

·          TAS to be applicable to all categories of taxpayers (without income/ turnover threshold).

·          TAS to be in harmony with the provisions of the Act and in case of any conflict, provisions of the Act to prevail.

·          Transitional provisions, wherever required, to be notified along with the TAS.

·          Appropriate modification proposed in the tax return form and Form 3CD for ensuring compliance with TAS. The tax auditor’s report, wherever applicable, to certify compliance with TAS. 

·         Certain areas which are not presently dealt with by ICAI but demand clarity, viz,  share based payment, revenue recognition by real estate developers, service concession arrangements (like Build Operate Transfer projects), exploration for / evaluation of mineral resources should be dealt with by notifying separate TAS.

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