Tax Talk: Will ICDS really bring down the number of tax disputes?

Published: May 5, 2015 12:01:05 AM

The government has notified 10 income computation and disclosure standards (ICDS) effective April 1, 2015.

The government has notified 10 income computation and disclosure standards (ICDS) effective April 1, 2015, to achieve greater consistency and synchronised application of accounting principles and mitigate tax disputes. Let’s find answers to some questions cropping up in the minds of taxpayers.

What is ICDS?

a framework for computation of taxable income, it is independent of the financial reporting method followed by the taxpayer.

Why ICDS?

The Central Board of Direct Taxes (CBDT) set up a committee in 2010 to look at the taxation related aspects of Indian Accounting Standards (Ind-AS) implementation. It recognised that certain accounting issues were a subject matter of tax litigation due to either diversity in accounting practices or divergence in views between tax payers and authorities, which needed to be addressed.

Who is impacted?

It is applicable to all taxpayers following the mercantile system of accounting for computing taxable income under the head, profit and gains of business or profession or income from other sources, be it companies, individuals, association of persons, body of individuals or Hindu Undivided Families, whether resident in India or not.

The impact

Delinking taxable income from accounting income and, thereby, increasing the compliance burden and tax exposure of taxpayers, ICDS has certainly moved them from their comfort zone. ICDS has revamped the tax computation structure for all taxpayers. If you thought ICDS doesn’t impact you, it is not true, as almost all taxpayers have income taxable under the head income from other sources, such as bank interest, interest on company deposits, etc.

ICDS, in respect of revenue recognition, provides that interest shall accrue on time basis determined by the amount outstanding and the rate applicable. Hence, interest on debentures and bonds, which was accounted by most taxpayers considering the due dates falling within the financial year, shall now be required to be recognised even for the intermittent period till the end of the year. You would be required to prepare separate computations for each type of interest bearing fund, meaning more work for you.

The tax department is also not getting much benefit from this, as it would merely result in taxation of income in an earlier year. Most taxpayers may end up following the cash method of accounting at least for certain income sources, instead of complying with such requirements, since law permits the taxpayer to use different accounting methods for each source of income.

What you should do?

Companies would be required to conduct an impact assessment to achieve clarity on the impact on taxable income, and to create a roadmap of internal system, internal control and process changes required to compute taxable income. I-t return forms and tax-audit forms may be modified in due course to report compliance with ICDS. The CBDT may issue clarification time to time to provide clarity and minimise potential areas of litigation.

The government must ensure that its vision of a non-adversarial approach is not lost in applying ICDS and its tax officers follow a fair process of assessment.

Rakesh Nangia

The writer is managing partner of Nangia & Co. With inputs from Neha Malhotra, manager, Taxation, Nangia & Co

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