The finance ministry announced, on Wednesday, that it has deferred the implementation of new tax accounting standards, also referred to as Income Computation and Disclosure Standards (ICDS).
Tax accounting standards are an effort to harmonise accounting standards with tax law as experts say differing approaches between the two are the cause of much tax litigation in India. In 2010 a government committee first deliberated on the matter and was followed by a discussion paper released by the finance ministry. Since then there have been several rounds of discussions and consultations and a final set of ten ICDS were notified in March 2015, to be applied starting assessment year 2016-17. That meant that companies would compute their taxable income for financial year 2015-16 using these ten standards.
But tax experts say the move to ICDS has been complicated by India’s shift to new IFRS-aligned-accounting standards, known as Indian accounting standards or IND-AS, whereas ICDS were based on the earlier accounting standards – Indian GAAP. There have also been complaints about inconsistencies, the lack of clarity on certain transitional provisions and the burden of additional paperwork.
President of Lucknow Chartered Accountants Society, Dhruv Seth said in a phone interview, “Some of the norms under the ICDS were against the basic cannons of taxation. Retention money was brought under the ambit of taxable income in the financial year it was retained. This is against the common principal that it becomes an income only when the benefit is accrued to the assessee.”
Seth also pointed out that ICDS literally would force assessees to maintain three separate books of accounts without visible benefits. He said, “Assesses have to keep a book of accounts under the Company Law. In addition to this, large listed companies outside India have to maintain International Financial Reporting Standards (IFRS) compliant account books.”
These issues prompted the finance ministry to appoint an expert committee led by to recommend amendments to the new tax accounting standards. But with the end of fiscal year 2015-16 time was running out. Hence on July 7, the finance ministry decided to defer the implantation of the standards to next year, that is assessment year 2017-18.
Pranav Sayta, direct tax partner at Ernst and Young (EY) said the postponement is a welcome move as even a committee headed by retired judge RV Easwar had suggested a deferment due to lack of clarity on the standards. Sayta said, in a phone interview, “Government is being receptive towards industry’s views on tax standards. It would not have made sense for the government to go ahead with different accounting standards that lead to a muddy environment. Deferment by a year is a good sign and clarification on several accounts need to be given by the government. We have made several representations to the government on the matter but do not wish to share details of our discussion with the finance ministry as yet.”
But KPMG’s Partner and Head of Accounting Advisory Services in India, Sai Venkateshwaran said the deferment might not go down well with a few companies. He said in a comment on e-mail, “There were several representations made by the industry to the finance ministry highlighting challenges faced by them in implementation of ICDS and related clarifications required. Considering that one of the reasons for introducing ICDS was to provide an equitable basis for computing taxable income when some companies start reporting under Ind-AS, it has come as a bit of a surprise that ICDS are being deferred. With some companies having voluntarily adopted the new Ind-AS standards for FY 15-16, the deferral of ICDS will be a problem for them, and CBDT will need to develop an alternate transition mechanism for these companies’.
Accountants are now hoping for more clarity from the finance ministry on a transition mechanism and on revisions to the tax accounting standards.
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