Hard-Pressed to meet revenue targets, the tax department is considering withdrawing an accounting flexibility enjoyed by Indian companies in dealing with their foreign exchange gains/losses. This means the department will no longer allow companies to enjoy the freedom obtained in the wake of the global economic crisis on charging defined forex gains/losses to profit and loss account for any particular year.
In other words, they will not be able to alter their profit profile for any accounting year/s with this freedom and regulate their tax outgo. Of course, for general accounting purposes, the flexibility will remain, as this is the domain of the accounting standard setter, the Institute of Chartered Accountants of India.
According to sources, the revenue department is finalising an accounting standard to deal with foreign exchange losses and gains for taxation purposes especially in the case of forward contracts taken on foreign currency.
The move will have a bearing on corporates holding foreign currency monetary items, which includes nearly the whole of India Inc. A number of companies including REC, IOC, NTPC, Suzlon Energy, Wockhardt, TVS Motor and Indian Railway Finance Corporation have benefitted from the flexibility in preventing forex losses from affecting profits in a particular year/years.
Due to the suspension of Accounting Standard 11 dealing with ?effects of changes in forex rates? from December, 2006, companies get discretion in treating their losses on foreign currency monetary items including loans and forward contracts.
Businesses now have the liberty to add any increase in foreign loan liability arising from a weaker currency to the acquisition cost of a capital asset for which the loan was taken. If they wish, in other cases such as forward contracts, they could keep the forex gains and losses in a separate account and charge it to the profit and loss account either as an income or expense over the life of the contract. That would prevent profits taking a beating in one go due to forex losses.
CBDT wants a uniform treatment of forex gains and losses by the industry. Its proposed tax accounting standard will also specify whether a forex gain should be treated as a capital receipt or as a revenue receipt. If forex gain is treated as revenue receipts, it becomes taxable. ?Now there is a leeway to both sides. We want to provide stability for tax purposes,? said a person privy to the development.
The discretion on charging the foreign currency loss to the balance sheet as increased cost of purchasing a capital asset was given in 2009 with effect from 2006 as companies incurred heavy losses on foreign loans. That was implemented by suspending Accounting Standard 11 of accounting rule maker ICAI, that stipulated forex losses and gains should be marked to market. In the economic crisis years, showing forex loss as expenses would have severely reduced corporate profits.
