(icai) separate accounting standards for tax calculation

Notification 1367 views 2 replies

CA Pallav Singhania

IT System Auditor

33683 Points Joined April 2010

ICAI finds move confusing, wants plan to be dropped

29-Oct-2011

The apex accounting standards-setting body, Institute of Chartered Accountants of India (ICAI), will ask the finance ministry to drop plans for separate accounting standards for tax computation purposes.

The move comes in the backdrop of a recommendation made by an expert committee constituted by the ministry’s Central Board of Direct Taxes (CBDT) for a new set of ‘Tax Accounting Standards' (TAS), which are distinct from the accounting standards issued by the ICAI or notified by the MCA for tax computation purpose.

ICAI feels a new set of standards could be confusing and unnecessary as the institute can make amends according to the CBDT recommendations to provide an uniform accounting system for all purposes.

KEY SUGGESTIONS OF THE CBDT PANEL

Separate accounting standards to be notified under the I-T Act
TAS should be made applicable only to the computation of taxable income. No need for separate books of account on the basis of TAS
A reconciliation between the income according to the financial statements and income as computed under TAS will be required
Should be applicable to only taxpayers who follow the mercantile system

“Most of the recommendations are similar to the changes we had proposed in the revised accounting standards. We will discuss the issue next week and provide our inputs to the ministry,” said G Ramaswamy, president ICAI.

Based on the CBDT recommendations, the ministry had issued a discussion paper on October 17, which includes suggestions for a new set of accounting standards under the Income Tax Act and draft TAS on Construction Contracts and Government Grants.

If the recommendations in the discussion paper are incorporated in the Act, taxable income would be computed based on provisions of the TAS, irrespective of the standards followed for the preparation of the financial statements.

“The proposal to issue separate TAS will represent a significant change for taxpayers. Tax payers would need to evaluate the requirements of the draft TAS proposed from time-to-time, and determine the specific areas of impact. The recommendations in the current discussion paper will partially address one of the key stated bottlenecks for implementation of the Indian accounting standards (the new accounting standard readied by ICAI), by requiring computation of taxable income using a uniform basis,” an explanatory note from global consultancy KPMG said.

Though the provisions of the Income Tax Act, 1961, and the Finance Act, 1995, empower the government to govern the computation of taxable profits and notify standards for such purposes, not many standards have been set by the finance ministry. In the absence of such notified accounting standards under the Income Tax Act, companies generally compute their taxable income following the ICAI accounting principles and policies followed for the preparation of financial statements, subject to specific provisions of the Act and after considering various judicial pronouncements.

Recently, ICAI has revised its accounting standards to converge Indian Standards with what is known as International Financial Reporting Standards (IFRS). However, the new standards were not made operational due to several mismatches with the views taken by the tax authorities.

The CBDT committee, set up in December 2010, was meant to solve this problem by finding ways to harmonise the accounting standards issued by the ICAI with the direct tax laws in India, and suggest standards which need to be adopted under Section 145(2) of the Income Tax Act. (Business Standard)

Replies (2)

Rahul Gupta

Chartered Accountant

644 Points Joined November 2010

I thinks (TAS) must not be implemented

CMA.Devarajan Swaminathan

ACMA

1067 Points Joined January 2009

I would like to suggest to base the cost principles in Construction Contracts and treatment of Government Grants on the Generally Accepted Cost Accounting Principles (GACAP) AND Cost Accounting Standards (CAS) as issued by The Institute of Cost and Works Accountants of India (ICWAI).

Below are some observations in the treatment as provided in TAS and the comparision in its treatment as suggested in the GACAP and CAS.

Government Grants:

GACAP:

Any Subsidy / Grant / Incentive and any such payment received / receivable with respect to the input cost is reduced from cost for ascertainment of the cost of the cost object to which such amount pertains.

TAS:

Where the Government grant relates to a non-depreciable asset or assets of a person requiring fulfillment of certain obligations, the grant shall be recognized as income over the same period over which the cost of meeting such obligations is charged to income.

Construction Contracts:

TAS:

Contract Costs
11. Contract costs shall comprise of :
(a) costs that relate directly to the specific contract;
(b) costs that are attributable to contract activity in general and can be allocated to the contract;
(c) such other costs as are specifically chargeable to the customer under the terms of the contract; and
(d) allocated borrowing costs in accordance with the Tax Accounting Standard on Borrowing Costs.

These costs shall be reduced by any incidental income, not being in the nature of interest, dividends or capital gains, that is not included in contract revenue.

12. Costs that cannot be attributed to any contract activity or cannot be allocated to a contract shall be excluded from the costs of a construction contract.

13. Contract costs include the costs attributable to a contract for the period from the date of securing the contract to the final completion of the contract. Costs that are incurred in securing the contract are also included as part of the contract costs, provided
(a) they can be separately identified; and
(b) it is probable that the contract shall be obtained.

When costs incurred in securing a contract are recognised as an expense in the period in which they are incurred, they are not included in contract costs when the contract is obtained in a subsequent period.

14. Contract costs that relate to future activity on the contract are recognised as an asset. Such costs represent an amount due from the customer and are classified as contract work in progress.

GACAP:
The above contract cost should be based on CAS and GACAP.
According to TAS, Costs that cannot be attributed to any contract activity or cannot be allocated to a contract shall be excluded from the costs of a construction contract, instead the concept in PARA 6 and PARA 8 of GACAP on Application Guidance of Admin O/H may be applied.

PARA 6 of GACAP application guidance on Administration Ovedheads:
The use of the terms “share of administrative overheads relating to production” and “share of administrative overheads relating to selling” in the erstwhile Cost Accounting Record Rules has led to arbitrary practices in some entities to assign all administrative overheads on an arbitrary ratio say 60:40 between production and selling. These terms can only refer to administrative costs of functions attached to production or selling. There will be a residuary head of “Administrative Overheads” which cannot be assigned to production or selling functions representing costs of policy making and strategic management and are to be treated as period costs. Also included in this category are expenses such as Directors sitting fees, audit fees, filing fees and other corporate expenses. Paragraph 6.3 in Cost Accounting Standard 3 on overheads should be interpreted in the light of the above discussions.

PARA 8 of GACAP application guidance on Administration Ovedheads:
The assignment of as much of the administrative overheads as possible based on identified cost drivers is recommended. The balance of administrative overheads can only be assigned to cost centres or objects based on capacity or sales value. It is usual in textile industry to charge corporate office cost to mills based on installed spindle capacity.

For Treatment of Borrowing Costs, GACAP on Interest and Finance Charges may be applied.