Keen to provide certainty in taxation and to cut down on disputes, finance minister P Chidambaram is likely to introduce the concept of tax accounting standards (TAS) in the Income Tax Act through the Finance Bill, 2013, so that calculation of income tax other than the minimum alternate tax is independent of a company’s book profits.
Persons privy to the government’s thinking said modifications to Section 145 of the Income Tax Act to allow calculation of an entity’s taxable income based on TAS without having to maintain two sets of accounts for stakeholders and the tax authorities is expected soon. There could also be a mention of this in Chidambaram’s forthcoming Budget speech.
TAS would have a major impact on tax outgo of companies, especially those in the construction and engineering sectors and banks, in terms of curtailment of freedom in accounting flexibilities. The taxable income of BHEL, L&T and Hindustan Construction, for instance, are set to go up across the board under TAS as it disallows the existing conservative approach allowed under Accounting Standard 3 of recognising revenue from contracts only after their completion if there is an uncertainty in revenue realisation . Under the percentage completion method of recognising revenue proposed in TAS, these companies have to show income as the projects progresses, allowing early taxation of income. BHEL recently reported a 17.5% drop in its net profit for October-December to R1,182 crore on the back of a slowdown in the power sector that prevented it from booking revenue from several projects despite incurring expenditure.
The introduction of TAS will also necessitate some changes in the tax return forms. The Central Board of Direct Taxes (CBDT) has been working on TAS in order to reduce the accounting alternatives allowed to taxpayers by the accounting rule maker ICAI in some of the 28 standards. The proposed TAS will be applicable for all income tax payers, not just corporate assessees. From the year TAS is implemented, taxpayers have to compulsorily follow it while calculating their income tax liability, which could be quite different from what is reported in the profit and loss account prepared as per the Companies Act.
However, sources said TAS may not immediately be made applicable to decide on the liability of having to pay MAT, which is based on book profits calculated as per the Companies Act that mandates use of ICAI’s standards.
Since ICAI’s implementation of IFRS-compliant accounting standards is uncertain, use of the proposed tax accounting standards for MAT calculation will be determined later on. The Companies Bill, 2012, passed only in Lok Sabha, has in the meantime proposed the creation of a National Financial Reporting Authority (NFRA) to frame accounting norms under the company law that will determine book profits. “NFRA will become the final body on matters related to accounting and auditing standards, we are made to understand," said SK Agrawal, president of ICAI.
Facing protests from the corporate sector over some of the recent tax demands, it has become imperative for the government now to take concrete steps to reduce litigation and to ensure tax certainty. At present, there is flexibility in the standards issued by ICAI that are notified under the Companies Act, which makes it possible to avoid or defer payment of taxes. TAS aims to reduce the options available to taxpayers in deferring tax payment.
Enforcing TAS is expected to significantly affect the tax liability of banks that have foreign branches as well as that of engineering and construction firms such as BHEL, L&T and Hindustan Construction, experts said.
* Realty cos must follow percentage completion method to book revenue from projects
* Engineering & construction firms cannot defer revenue recognition till project end
* Banks with overseas branches will have to pay taxes on forex gains