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New CBDT norms for taxable income

A panel set up by the finance ministry has recommended amending the Income Tax Act to introduce Tax Accounting Standards that companies have to compulsorily follow while calculating their income for tax purposes.

A panel set up by the finance ministry has recommended amending the Income Tax Act to introduce Tax Accounting Standards (TAS) that companies have to compulsorily follow while calculating their income for tax purposes. The income thus computed, based on which taxes are to be paid, could be quite different from the profit or loss reported in the profit and loss account prepared as per the Companies Act.

The proposed TAS, as opposed to the fair-value-based accounting standard based on the International Financial Reporting Standards (IFRS), would practically limit companies’ freedom to spread profits across many assessment years to manage tax outgo.

The Central Board of Direct Taxes (CBDT) said on Friday that its Accounting Standards Committee has recommended 14 tax accounting standards.

The implications of TAS for companies? tax liability are huge. This is because of the difference in revenue recognition in many areas such as forex losses/gains, construction contracts and government grants.

TAS-compliant profit calculation and the resultant tax demand on firms would differ from that of IFRS and even some of the existing accounting standards.

Though generalisations could best be avoided, analysts said TAS might avoid a sudden fall in profits reported due to rupee depreciation. This, for instance, means a higher income in a particular year and resultant higher tax outgo.

In the IFRS system, being marked to market, a depreciation of the rupee leads to higher repayment obligation on foreign loans and, consequently, reduces profits, leading to lower tax outgo.

FE was the first to report the government’s plan to bring separate accounting standards for taxation purposes, on October 17.

TAS basically seeks to protect the tax base from any volatility in the taxable income that may arise as the country moves ahead with implementing fair-value-based accounting standards. India is committed to enforcing an adapted version of IFRS in order to provide comparability of financial statements with those of businesses in more than 100 countries including European nations.

The panel said that Section 145 of the Income Tax Act should be amended to implement TAS.

“TAS is based on judicial pronouncements on domestic tax laws and the principles of prudence enshrined in the existing Indian accounting standards that may differ from the notional gains and losses captured by fair-value-based accounting (IFRS),? said a person who assisted the revenue department in framing the proposed standards.

The principles of prudence allow a taxpayer to recognise anticipated losses in accounts but not gains and would ensure that in most cases, revenue flows are prompt for a fiscally strained government than the IFRS system, which is prone to volatility.

?Since this amounts to differential treatment for recognition of income and losses, TAS provides that expected losses or mark-to-market losses shall not be recognised unless permitted by any other TAS,? the report said.

The panel said that there is flexibility in the standards issued by the Institute of Chartered Accountants of India (ICAI) that is notified under the Companies Act, which makes it possible to avoid payment of taxes. TAS aims to reduce the options available to taxpayers in deferring tax payment.

Analysts anticipate hardships for the corporate world in following different norms for Companies Act compliance and for tax payments. ?If the purpose of issuing TAS was to ensure smooth implementation of IFRS, rather than changing the manner of computing tax, TAS should have remained tax neutral, which they are not. The impact is likely to be even bigger than the proposed Direct Taxes Code,? said Dolphy D’Souza, partner and national leader, IFRS, in a member firm of Ernst & Young.

Experts indicated TAS may alter norms of taxation significantly. ?As the law stands today, the profits computed as per established accounting standards shall have primacy for tax purposes unless the Income Tax Act has a different prescription. Introducing TAS will add another variable to established principles of taxation,? said Mukesh Butani, chairman, BMR Advisors.

IFRS requires mark-to-market valuation of assets such as land, financial investments and liabilities including loan repayment obligations. The system, therefore, gives a more realistic picture of a company’s financial health compared with the existing Indian accounting standards but could infuse sharp volatility in income reporting.

The revenue department is of the view that while companies could prepare their financial statements based on the Indian version of IFRS when it is notified by the ministry of corporate affairs, they should compulsorily calculate their tax liability based on TAS. The department prefers the historical cost method of valuing assets (based on their cost of purchase) for taxation purposes rather than their present fair market value prescribed by IFRS, which may not be relevant for taxation unless the asset is sold. The tax department is averse to frequent sentiment-driven revaluation of assets and liabilities as it may lead to taxation of unrealised gains as well as reduce tax liability on account of notional losses.

Companies, however, may not have to maintain two sets of accounts. They only have to make adjustments in the net profit or loss computed as per the accounting standards prescribed under the Companies Act to arrive at the taxable income.

India was supposed to adopt IFRS from April 1, 2011, but an adapted version called Ind AS is now being finalised.

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First published on: 27-10-2012 at 00:51 IST
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