India: Revised Income Computation And Disclosure Standards

Section 145 of the Income tax Act, 1961 ("the Act"), as amended by the Finance Act, 1995, empowered the Central Government to notify the Accounting Standards to be followed for computing income under the head "Profits and Gains of Business or Profession" and "Income from Other Sources". In pursuance thereof, in 1996, two Accounting Standards relating to "Disclosure of Accounting Policies" and "Disclosure of prior period and extraordinary items and Change in accounting policies" were notified.

Several committees were formed by the Central Government for drafting and notifying Accounting Standards for the purpose of the aforesaid section. Finally, the Central Board of Direct Taxes ("CBDT") vide Notification No. 33/2015 on March 31st 2015, i.e., after almost two decades, notified 10 Income Computation & Disclosure Standards ("ICDS"), to be effective from Assessment Year 2016-17 onwards.

Subsequent to notification of the ICDS, a number of representations were received from the stakeholders which were examined by an Expert Committee. Since the Committee recommended amendments to the notified ICDS and revision of ICDS/ issue of clarifications as recommended by the Committee was under consideration, the Government decided to defer the applicability of ICDS and made the same applicable, w.e.f., April 1st 2016, i.e., from previous year 2016-17 (Assessment Year 2017-18).

The Central Government has vide Notification dated 29 September 2016 released new set of ICDS. The revised ICDS are applicable from assessment year 2017 -18 and would have bearing on the taxable income of the current financial year and subsequent financial years.

The revised ICDS are applicable to all taxpayers following mercantile system of accounting, except individual and Hindu Undivided Family not required to get his accounts of the previous year audited in accordance with the provisions of section 44AB of the Act.

The key changes that have been brought about by the revised ICDS issued on 29th September, 2016 are as under -

(a) ICDS –II – Inventories

  • ICDS defined cost of inventories to, inter alia, include cost of services. ICDS provided that in case of service providers, cost of services shall consist of labour and other costs of personnel directly engaged in providing the service including supervisory personnel and attributable overheads.
  • It was unclear whether the aforesaid requirement of inclusion of cost of services in cost of inventories applied only to services providers. The words "in case of a service provider" have been deleted in the revised ICDS. In other words, the aforesaid requirement of including cost of services in inventory valuation applies to all entities who fall within the ambit of ICDS.
  • Further, standard costing has also been permitted for valuation of inventories in addition to the retail method of valuation.

(b) ICDS-III –Construction contracts

  • In terms of original ICDS, income from construction contract was required to be recognized by following percentage of completion method ("POCM").
  • The revised ICDS provides that in relation to construction contracts under progress as on 31.3.2016, the method of accounting being regularly followed by an entity in respect of the same, even if different from POCM, may continue to be followed.

(c) ICDS-IV- Revenue recognition

  • The revised ICDS now additionally provides that revenue is required to be recognised on a straight line basis over the specific period where the services are provided by an indeterminate number of acts over a specific period of time
  • However, revenue from service contracts with duration of not more than 90 days may be recognised when the rendering of services under that contract is completed or substantially completed.
  • The interest on refund of any tax, duty or cess shall be recognised as income on receipt basis.

(d) ICDS-V - Tangible Fixed Assets

  • The requirement of maintaining the details of jointly owned fixed assets in the fixed asset register separately has been done away with.

(e) ICDS –VI- Effects of changes in foreign exchange rates

  • It is now provided that on the last day of each previous year, non-monetary item being inventory which is carried at net realisable value denominated in foreign currency shall be reported using the exchange rate that existed when such value was determined.
  • The requirement of classification of foreign operations into integral and non-integral foreign operations has been done away with.

(f) ICDS- VIII- Securities

  • This ICDS has now been bifurcated into two parts – Part A, relating to securities held as stock in trade, and Part B, relating to securities held by a scheduled bank or public financial institutions formed under a Central or a State Act or so declared under the Companies Act, 1956 or the Companies Act, 2013.
  • In relation to entities covered under Part B, it has been provided that the securities shall be classified, recognised and measured in accordance with the extant guidelines issued by Reserve Bank of India in this regard.
  • Option of applying weighted average cost formula is now provided for determining cost of security, where the actual cost initially recognised cannot be ascertained by reference to specific identification. Earlier only option of first-in-first-out method was provided.

(g) ICDS-IX- Borrowing Cost

  • The revised formula for general borrowing seeks for capitalisation of interest cost, irrespective whether such borrowing has been utilized for acquisition of asset, whereas the erstwhile ICDS provided for capitalisation of "funds borrowed generally and utilised for the purpose of acquisition........ of a qualifying asset".
  • For the purpose of computing the borrowing cost eligible for capitalisation in relation to general borrowing, only the amount of qualifying asset, to the extent, it is funded out of specific borrowing is to be reduced, as against the full value of such asset as per the erstwhile ICDS.
  • In connection with the borrowing costs eligible for capitalisation, it has now been provided that such cost shall only be capitalised till the date when the asset is first put to use and in case of inventory, when substantially all the activities necessary to prepare such inventory for its intended sale are complete.

Vaish Comments

ICDS will bring about a paradigm shift in the manner of computation of taxable income chargeable under the head "Profit and Gains of Business or Profession" and "Income from Other Sources" from assessment year 2017-18, which is the first year of its implementation. While the revised ICDS do address some of the concerns of the stakeholders, significant issues / doubts arising out of ICDS originally notified have, unfortunately, not been addressed. For example, the revised ICDS fails to consider, inter alia, the following important issues highlighted by the stakeholders:

  • Whether judicial precedents interpreting provisions of the Act would be regarded as law and, therefore, override ICDS if inconsistent with provisions of ICDS?
  • No relief granted in case of mismatch between MAT and ICDS which may result in double taxation?
  • ICDS is silent on the treatment of unrealised gains in respect of transactions required to be marked to market – whether prudence concept can be followed?
  • Whether interest would be considered for inventory valuation if there is delay on account of lockouts/ business suspension / non-availability of raw material and the final products gets delayed beyond12 months?
  • Whether ICDS-III applies to Real Estate Developers?
  • Where adjustment were to be made by the Revenue in assessment to the closing stock, whether such adjustment will be considered in the opening stock of next year?
  • Whether interest incurred during a particular year on loan borrowed for purchase of securities would be added to the cost of security where such interest is payable in the subsequent year?
  • Whether suo moto allocation of interest on amount borrowed generally and utilized for purpose of acquisition, construction or production of a qualifying asset made on any other basis would be acceptable?

Unless the aforesaid issues are adequately addressed/ clarified, the objective of the Government to ease the carrying on of business in India and reduce litigation would not be achieved.

Further, the Government needs to seriously consider as to whether MAT provisions are anymore required, considering that with the introduction of ICDS, which as per the Government has the effect of bringing the accounting treatment in harmony and as close as possible to the provisions of the Act, it would not be possible for companies to reduce taxable income by resorting to so called accounting jugglery, which was the raison d'etre provided for introduction of MAT provisions. By abolition of MAT provisions, there would at least be some reduction in compliance burden on companies.

We will keep you updated on further developments on the subject matter.

© 2016, Vaish Associates Advocates,
All rights reserved
Advocates, 1st & 11th Floors, Mohan Dev Building 13, Tolstoy Marg New Delhi-110001 (India).

The content of this article is intended to provide a general guide to the subject matter. Specialist professional advice should be sought about your specific circumstances. The views expressed in this article are solely of the authors of this article.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Puneeta Kundra
 
In association with
Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions