The last two decades have been extremely challenging for the Indian accountant. With the Indian economy being gradually liberalised, global accounting practices reached the Indian shores. As foreign investors started investing in Indian businesses, there was a growing demand for Indian accounting to converge to International Financial Reporting Standards (IFRS). While everyone realised that this was inevitable in the long run, the change from a historical cost convention to a fair value system which is significantly different is beset with problems. In order to harmonise IFRS to India specific situations, Ind AS-the Indian version of IFRS was mooted. It was however felt that Indian businesses were ill-equipped to adopt even Ind AS. It was therefore decided to adopt a calibrated approach and with effect from 1st April 2016, adoption of Ind AS, was made mandatory for listed companies, while others were permitted to follow the accounting standards applicable to them as prescribed either by the relevant statute or those formulated by the accounting regulator, Institute of Chartered Accountants of India (ICAI). It then became apparent that identically placed entities following two distinct accounting systems would show different book results. In order to ensure that these entities paid the same tax, ”Tax Accounting Standards” as they were then called were thought of.
Thus, the objective of these standards was to modify the book profit in the process of computation of income. It was universally accepted that it was impractical for any business entity to maintain two sets of accounts – one for reporting to stakeholders and the other for paying tax. The tax accounting standards were expected to bridge that gap. However, somewhere along the way, that objective seems to have been totally lost sight of.
The committee that was formed for this purpose made its recommendations by way of a report and tax accounting standards were placed for comment is in the public domain. To what extent the responses from the public were considered is a matter of debate. Finally, ten “Income Computation and Disclosure standards” ICDS were notified by the government and they came into effect from accounting year commencing from 1st April 2015, relevant to assessment year 2016-17. As notified today, the standards will create a host of complications.
Firstly, these standards require “disclosure” of policies followed. They apply to all assessees following the mercantile method of accounting and having income under the head “profits and gains of business” or “income from other sources “. These are not accounting standards but computation standards. Therefore, the place of disclosure is a matter of debate. It must be remembered that the amended section 145 gives a power to the assessing authority to make a best judgment assessment in case of non-compliance. It was thus essential that these standards were precise and comprehensive to the extent possible which they do not appear to be.
Secondly, these standards completely exclude those following cash method of accounting. While this will certainly give relief to those assessees who follow only the cash method, it could cause complications when under the same head, two different methods are followed for two different sources. The standards should have addressed situations arising in this scenario.
Thirdly, it is provided that wherever the computation standards are in conflict with the provisions of the Income -tax Act (the Act), the provisions of the Act would prevail. While this sounds to be perfectly acceptable, it could create significant controversy. It is a well-established proposition that the Supreme Court interprets the law, as it always stood. Given the Indian judicial system, it could be close to two decades for a particular provision to be finally interpreted by the apex court. In a situation like this, if income is computed on the basis of ICDS and the same is in harmony with the law as it stood at the time, but subsequently the law is interpreted differently by the apex court, then it would create great difficulty. One would possibly say that this is the position even today. But now there would be two prescriptions to be interpreted under the same statute. The Act and ICDS themselves.
Finally, one needs to consider the effect of the transitional provisions. In a couple of standards namely construction contracts and revenue recognition, the transition provisions are extremely harsh. They would apply to unfinished contracts entered into before 31st March 2015, where the assessee was following completed contract method, but now is forced to follow percentage completion. This would create a substantial liability in the year of transition i.e., assessment year 2016-17.
In fact, a preliminary study of ICDS seems to suggest that the cost of compliance will increase significantly. Though the standards do not require maintenance of separate sets of books as the computation is of taxable income and not book profit, the prescriptions are such that a virtually parallel separate record will have to be maintained by each entity of some size. With the current attitude of revenue officials being what it is, one is really concerned about the litigation that will ensue.
The way the standards have been drafted, the objective seems to be to garner maximum revenue at the earliest. It may have been easier to recommend some adjustments to book profit to take care of some of the issues thrown up. If that could be achieved, Income Computation and Disclosure standards were possibly unnecessary. If this was not feasible then the issues arising out of Ind AS, in regard to computation of income ought to have been addressed, comprehensively. The ICDS as notified will only increase litigation.
The last but not the least, power to formulate standards affecting taxable income is virtually power to amend the law without going to the Parliament. One wonders how desirable this is.
If the government is serious about promoting their pet theme of ease of doing business, like GAAR, ICDS in their present form certainly need a rethink.
