The amended provisions give an ambiguous interpretation of capitalising all the borrowing costs under the prescribed formula, irrespective of their actual utilisation for capital purposes
The Income Computation and Disclosure Standards (ICDS) were introduced last year by the Union government to ensure consistency in tax computation and reporting of taxable income. This was promoted as a key step towards reducing tax litigation. However, ambiguities over various interpretational issues arising out of the provisions of ICDS caused taxpayers to resist its adoption.
Given these concerns, the government constituted an expert committee to fine-tune the provisions. Concurrently, there was the welcome announcement of deferring the implementation of ICDS by one year.
Within the span of a few months, the government has notified the revised ICDS provisions, wherein an attempt has been made to address some of the pain-points. Also, the revised format of disclosures required in the tax audit report in respect of ICDS has also been simultaneously notified, giving sufficient time to taxpayers to understand and finalise positions vis-a-vis disclosure requirements.
Notably, only three ICDS provisions, pertaining to Accounting Policies (ICDS-1), Government Grants (ICDS-7) and Provisions, and contingent liabilities and contingent assets (ICDS-10), remain unchanged with amendments being introduced in the rest seven standards.
Some of the key changes are summarised here:
Standard costing, one of the methods for inventory valuation for accounting purposes that wasn’t included under ICDS-2 that deals with valuation of inventory, has now been included as a permitted method of inventory valuation. The removal of specific reference to “service providers” in provisions for determining cost of services may be interpreted as absolving service providers of the need to maintain inventory for services, a much required relief. However, one may have to wait for more guidance or specific clarification in this regard from the government.
The transitional provisions under ICDS-3, pertaining to construction contracts, have been relaxed to provide that contract revenue and costs with respect to contracts ongoing as of the date of ICDS implementation—April 1, 2016—shall continue to be recognised based on the method previously used by the taxpayer.
ICDS-4, which provided recognition of service revenue on a ‘percentage of completion’ basis, has been amended to provide for relaxation in certain cases. Under the revised ICDS, revenue from small-duration service contracts (of not more than 90 days) may be recognised on completion. Further, revenue under certain periodic services may now be recognised on a straight-line basis. These relaxations would be welcomed by the service industry. Similarly, it is now permitted to recognise the interest on refund of any tax, duty or cess on a receipt basis, as against the time-basis recognition prescribed generally for interest income—this seems to be intended to settle another subject matter of potential litigation.
Under ICDS-5, relating to tangible fixed assets, the requirement to indicate the details of jointly-owned tangible fixed assets separately in the tangible fixed assets register has been done away with.
With a view to reduce complexities, the concept of integral and non-integral foreign operations has been removed under ICDS-6, which deals with the effects of movement in foreign exchange rates. The conversion of such financial statements of foreign operations shall be done using the same principles and procedures used for the taxpayer’s domestic operations.
Shares of private companies have been brought under the purview of ICDS-8 which deals with securities held as stock-in-trade, and a separate chapter has been included for holdings of scheduled bank or public financial institutions. Lastly, ICDS-9, dealing with treatment of borrowing costs, has been amended to provide much-needed clarity on some computational issues. The formula prescribed for computing general borrowing costs eligible for capitalisation provided for the exclusion of those assets which are directly funded out of specific borrowings. This gave rise to confusion over treatment of assets that were partly funded out of specific borrowings; this has now been set to rest by excluding assets to the extent that these are funded out of specific borrowings from the ambit of the formula. Further, the amount of borrowing costs eligible for capitalisation computed as per the prescribed formula shall now be adjusted in accordance with the period of capitalisation prescribed in ICDS.
While the swift action of the government in bringing in these amendments and providing respite to harrowed taxpayers is much appreciated, there is still some ground left to be covered. The gaps between accounting standards, income-tax provisions and ICDS provisions are yet to be completely bridged, and given tax authorities’ record of interpretations/positions in ambiguous situations, there is need for greater clarity over some ICDS provisions.
To name a few, the disconnect in capitalisation of borrowing costs under accounting and tax provisions still remains. In fact, the amended provisions appear to have given an ambiguous interpretation of capitalising all the borrowing costs under the prescribed formula, irrespective of their actual utilisation for capital purposes. Similarly, the receipt-based recognition of government grants and completion-based recognition of retention money under construction contracts is still in conflict with the accepted principles under income-tax provisions.
The quick introduction of revisions in ICDS provisions and notification of the disclosure requirements underscores the government’s intention to bring in clarity and uniformity while giving sufficient time to taxpayers to prepare for the change. However, in order to make it an undisputed success and achieve the desired objective, there is a need to reconsider some of the suggestions made by the taxpayers/expert committee that have not found place in the current notification. Also, in line with the expert committee recommendations, the government should also work out a plan for convergence of the taxation framework with the IND-AS regime before implementing the ICDS.
The author is partner (direct tax), PwC. Views are personal