ICDS - Impact analysis

Mohit Joshi , Last updated: 21 June 2018  

Topic - Analysis of Income Computation and Disclosure Standards

Introduction -

Income Computation and Disclosure Standards (better known as ICDS) are standards that will operationalize a new framework for computation of taxable income. Their scope is restricted to computation of income only and will not provide methods to maintain the books of accounts for the purpose of ‘Financial reporting framework'.

Recently, one of the amendments brought in by the Central Board of Direct Taxes (CBDT) in the taxation regime during the year 2015 was the notification related to ten 'Income Computation and Disclosure Standards (ICDSs)'. These standards are notified with reference to Section 145(2) of Income tax act, 1961 to be applicable from A.Y 2017-18. The history of ICDSs goes back to notification no. 32/2015 dated 31st March, 2015 released by CBDT where these standards were first implemented. However, the said notification was rescinded by CBDT on 29th September 2016 vide Notification no. 87/2016 where 10 revised ICDSs were notified.

Applicability of ICDSs -

The Revised 10 ICDSs notified by CBDT vide notification no. 87/2016 dated 29.09.2016 are to be followed by all Assesses except individuals or a HUF who are NOT required to get his accounts of the previous year audited in accordance with the provisions of section 44AB of the Income-tax Act,1961 which deals with Tax audit.

The ICDSs are applicable mandatorily from A.Y. 2017-18 to assesses fulfilling applicability criteria and following mercantile system of accounting. Therefore, assesses following cash system of accounting are outside the purview of ICDSs.

Purpose served by ICDS -

The ICDSs are specially notified by CBDT for the purposes of computation of income chargeable to tax under the head 'Profits or Gains for Business or profession" and "Income from other sources". These are NOT applicable for computation of income under any other head of income.

List of 10 Notified ICDS -

  1. ICDS I: Disclosure of Accounting Policies
  2. ICDS II: Valuation of Inventories
  3. ICDS II: Construction Contracts
  4. ICDS IV: Revenue Recognition
  5. ICDS V: Tangible Fixed Assets
  6. ICDS VI: Effects of Changes in Foreign Exchange Rates
  7. ICDS VII: Government Grants
  8. ICDS VIII: Securities
  9. ICDS IX: Borrowing Costs
  10. ICDS X: Provisions, Contingent Liabilities & Contingent Assets

Analysis of ICDSs under different circumstances -

Adoption of Different methods for accounting under different sources/heads of income -

After amendment of section 145 (which deals with method of accounting) by CBDT, the law now, permits either the cash method of accounting or mercantile method of accounting for all sources under both the heads of income i.e., 'Profits and Gains of Business or Profession', and 'Income from Other Sources'. However, ICDS are applicable only to income computed considering mercantile system of Accounting.

Whether Change of Method for accounting is allowed Under ICDS -

Yes, it is allowed - An assessee is entitled to change his method of accounting, provided he follows such changed method regularly thereafter.

ICDSs provisions on assesse opting for Presumptive taxation -

ICDS is applicable to specified persons having income chargeable under the head `Profits and gains of business or profession' or `Income from other sources'. Therefore, the relevant provisions of ICDS shall apply only to income aspect for business computing income under the relevant presumptive taxation scheme. Under presumptive scheme only 2 ICDS namely, ICDS on Revenue recognition and ICDS on Construction Contract are applicable.

For example, for computing presumptive income of a partnership firm under section 44AD ( presumptive taxation ) of the Act, the provisions of ICDS on Construction Contract or Revenue recognition shall apply for determining the receipts or turnover, as the case may be.

ICDSs impact on Insurance companies -

The computation of income of insurance companies is governed by section 44 of the Act read with the First Schedule to the Act. The First Schedule excludes the operation of sections 28 to 43B ( which relates to Business/profession income), and requires the income to be computed as per the Profit & Loss account prepared under the Insurance Act and rules, and the Insurance Regulatory and Development Authority (IRDA) Act and Regulations, subject to certain adjustments laid down under the First Schedule. However, the IRDA Regulations require the accounts to be prepared in accordance of Accounting Standards prescribed by ICAI.

As per legal rulings, Section 44 (deals with income from Insurance business ) read with the First Schedule would prevail over ICDS.

Therefore, ICDS would NOT be applicable for the computation of business income of insurance companies.

ICDSs impact on income earned by Non Residents -

The provisions of ICDS apply to all taxpayers, irrespective of residential status of a person. Therefore, these are also applicable to Non-residents in the same way as they are applicable to residents.

However, certain circumstances where ICDS are NOT applicable in case of Non- residents are discussed hereunder -

  1. Where a non-resident taxpayer falls under a presumptive tax scheme, such as sections 44B, 44BB, 44BBA, 44BBB on the same logic as that of presumptive tax schemes applicable to residents, the provisions of ICDS should NOT apply.
  2. Where a non-resident claims the benefit of a double taxation avoidance agreement (DTAA), by virtue of section 90(2), the provisions of the DTAA would prevail over the provisions of the Income- tax Act, including section 145(2) and ICDS notified thereunder.

Further, in cases where the income is NOT determined under a presumptive tax scheme, but a flat rate of tax applies, such as under section 115BBDA (dividend income), the provisions of ICDS would apply, as the rate of tax is applied after determination of the income.

ICDS impact on Companies complying IND AS requirements -

ICDS shall apply for computation of taxable income under the specified heads irrespective of the accounting standards adopted by companies i.e. either Accounting Standards or Ind-AS. Therefore, ICDS also impact the taxable income of companies adopting IFRS converged standards i.e. Ind AS.

Duties of Tax Auditor regarding ICDS -

Tax auditor is the person supposed to do Tax audit as per section 44AB of Income tax act, 1961.

As per disclosure requirements, Tax Accounting Standard (TAS) Committee had recommended that a tax auditor is required to certify that the computation of total income is made in accordance with the provisions of ICDS. Accordingly, Form 3CD containing the details annexed to the audit report has been amended to include the details of adjustments required to be made to the profit or loss to reach profit in conformity with ICDS.

Also, a tax payer may consider preparing a reconciliation with profit and loss account and balance sheet to ensure that all adjustments required on account of ICDS have been considered.

ICDS applicability on TDS -

ICDS are concerned with computation of Taxable income and NOT with compliance of TDS provisions of Income Tax Act, 1961.Therefore, ICDS do NOT apply directly on TDS related provisions.

However, in some cases, the ICDSs may indirectly apply to the applicability aspect of the TDS. This is for the reason that the CBDT has taken a view that the ICDS should be applied for determining gross receipts/turnover for the purposes of section 44AD and applying the same rationale, for determining gross receipts/turnover for the purposes of section 44AB also, the ICDS would apply.

In case of individuals and HUFs, TDS provisions are attracted only if the gross receipts/turnover in immediately preceding financial year exceed the monetary limits specified in section 44AB. Consequently, the provisions of ICDS would indirectly have an impact on whether or not TDS provisions are attracted to an individual/HUF, even though ICDS are meant only for computation of income and not for any other purpose.

Judicial Rulings Vs ICDS -

The ICDS have been notified after due deliberation and after examining judicial views for bringing certainty on the issues covered by it. Certain judicial pronouncements were pronounced in the absence of authoritative guidance on the issues under the Act. But certainty to those issues is now provided by notifying ICDS under section 145(2), therefore ICDS are itself notified in relation to some judicial recommendation.

That's why, in cases where judicial rulings and provisions of ICDS are contradictory, Judicial judgements would have overriding effect on ICDS.

Circulars / Press releases of Govt. Vs ICDS -

Circulars issued prior to the ICDS coming into force may no longer apply if the ICDS contain a contrary provision, as the subsequent ICDS would render the circular invalid for the period after the ICDS come into force.

Similarly, in case of press releases issued prior to subsequent ICDS provisions, where the ICDS provisions provide for a contrary treatment, the subsequent ICDS provisions would prevail.

However, circulars issued after enforcing of ICDS shall have overriding effect on ICDS.

ICDS consideration during computation of MAT / AMT -

MAT - Since ICDS is not applicable for the purpose of maintenance of books of account, it is clear that the provisions of ICDS would not apply to the computation of 'book profits' for the purposes of Minimum Alternate Tax under section 115JB.

AMT - So far as Alternate Minimum Tax under section 115JC is concerned, since the starting point is the adjusted total income, which is derived from the total income, the adjusted total income would be based on the total income computed after giving effect to ICDS. There would therefore be an implied impact of ICDS on the computation of AMT.

Interpretation of ICDS -

Normally, since ICDS are based on AS, the AS interpretation would apply, where such term/phrase has also been used in the ICDS. In other cases, the tax law interpretation given to it by the courts would prevail. Terms as interpreted in Income tax act or in AS shall be interpreted in same way for the purpose of ICDS.

Disclosure Needs for ICDS -

Various ICDS provide for disclosure of different items. Given the fact that ICDS are not to be followed in the books of account, the disclosures are not required to be made in the final accounts.

Now the question arises, where should such disclosures be made regarding ICDS?

Considering the point the TAS Committee had recommended as under in its August 2012 report:

  1. 'For ensuring compliance with the provisions of ICDS by the taxpayer, the Committee recommends appropriate modification in the return of income i.e. Form 3, 5, and 6.
  2. For tax audit cases, the Form 3CD should also be modified so that a tax auditor is required to certify that the computation of taxable income is made in accordance with the provisions of ICDS.'

Further, in this respect a reference may be made to the clarifications on ICDS contained in Circular no. 10/2017, dated 23rd March, 2017 issued by the CBDT which states that 'Net effect on the income due to application of ICDS is to be disclosed in the Return of income.' The disclosures required under ICDS shall be made in the tax audit report in Form 3CD.

However, there shall not be any separate disclosure requirements for persons who are not liable to tax audit.


Income Computations and Disclosure Standards are notified to ensure arrival at bonafide taxable income for assesses following mercantile system of accounting. These will decrease the chances of tax evasion by the assessee having income under 2 heads namely 'profits or gains of business or profession' and 'Income from other sources'. Therefore, they are beneficial for financial interest of economy.

However, divergence b/w ICDS provisions and AS may increase the dilemma on part of tax payers. Therefore, to ensure proper compliance, divergence of ICDS with other regulatory provisions need to be reduced.

Finally, as concluding view, ICDS provisions help govt. to increase the tax net which ultimately leads to greater financial wealth of India.

The author can also be reached at mohitjoshi.sankalp@gmail.com

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Mohit Joshi
Category Income Tax   Report

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