The Central Goverenment has recently exposed drafts of two Tax Accounting Standards which it proposes to issue under the provisions of section 145(2) of the Income Tax Act, 1961. It may be recalled that soon after the introduction of the provision empowering the Central Government to issue accounting standards, two standards were issued, which were more or less inverbatim reproduction of the accounting standards issued by the Institute.
The Government believes that a tax payer can avoid payment of taxes by following a particular method of accounting and the standards issued by the Institute offer flexibility.
This belief of the Government is misplaced. The standards issued by the Institute alongwith Accounting Standards Interpretation have been adopted by the Government on the recommendations of the National Advisory Committee on Accounting Standards and issued them as standards applicable to Companies under section 211 of the Companies Act, 1956. These standards do not provide for alternatives except in few cases. These exceptions are also for valid reasons and do not lead to avoidance of payment of taxes. In some cases it may only result in timing difference. Has the Government carried out study of revenue leakage or postponement of revenue due to the so called flexibility in the accounting standards? It may be of interest if the Government can publish the figures of lost revenue.
The attitude of the Ministry of Finance of trying to collect the revenue at the earliest without having regard to the business reality needs a change. One has seen this attitude in collection of Service Tax as well. Service Tax for the last quarter of the financial year has to be paid even before the end of the fiscal year.
In July 2002, the Government, appointed a Committee for formation of accounting standards. This Committee categorically recommended that separate accounting should not be issued under the tax law and where there is leakage of revenue appropriate legislative amendments should be made. The Government did not accept the reccomendations.
CBDT therefore constituted a new Committee in December 2010. The report of this Committee has not been made public. Based on the recommendations of this Committee, the drafts of two Tax Accounting Standards have been issued. CBDt proposes to issue more standards in due cource.
It is now proposed that based on the Tax Accounting Standards the tax payer should prepare a reconciliation statement. The tax payer, on the face of it will, not be required to maintain two sets of books of account, one in accordance with the standards issued by the Institute (or Company Accounting Standards) and another set in accordance with the Tax Accounting Standards. However, the Government has conveniently ignored the fact that enormous effort will be required to prepare the proposed reconciliation statement.
Instead of harmonising the taxable income with the accounting income and making computation simple, the computation of taxable income from income in the financial books will become cumbersome, leading to unintended errors. This will not reduce litigation but only increase it.
The Tax Accounting Standards will open a backdoor way for advancing the year of taxability of a receipt and postponing allowability of expenditure without amending the Income Tax Act. It will not be surprising if through these standards attempt is made to change nature of a receipt from capital to revenue .
Kautilya has propounded the theory that the king should collect tax the way bee collects honey from the flower without causing any damage to it. Citizens are willing to pay their fair share of taxes provided the tax rates are reasonable, administration is fair and transparent, policies of the Government inspire confidence in the taxpayers and there is mutual trust. Tax Accounting Standards will only make payment of taxes, a burdensome exercise, even more burdensome without corresponding benefits.
