Central Board of Direct Taxes (CBDT) had earlier notified ICDS effective from tax year 2015-16, for compliance by all taxpayers following the mercantile system of accounting for the purposes of computation of income chargeable to income tax under the head "profits and gains of business or profession" or "income from other sources".

Concerns were raised by stakeholders on challenges arising from implementation of ICDS and pending revision of tax audit form to capture disclosures required in terms of ICDS, CBDT had announced deferment of the effective date of ICDS by one year vide Press Release in July 2016. Now in deference to this, CBDT has rescinded the old ICDS and notified amended ICDS to be effective from tax year 2016-17 and onwards. These amended ICDS also are for compliance by the taxpayers following the mercantile system of accounting and for the purposes of computation of income chargeable to income tax under the Business head or Other Sources head. The amendments aim to bring the amended ICDS closer to Accounting Standards issued by the Institute of Chartered Accountants of India (ICAI).

Key amendments made to old ICDS are summarized below:

  1. permitting standard costing method for inventory valuation;
  2. making the amended ICDS applicable to service and construction contracts commencing after 1 April 2016 and thus providing complete grandfathering to such contracts commenced prior to 31 March 2016 from applicability of ICDS;
  3. permitting straight line method for revenue recognition if services are provided by an indeterminate number of acts over a specific period of time;
  4. revenue from service contracts whose duration does not exceed 90 days may be recognized when rendering of services is complete or substantially complete
  5. interest on refund of any tax, duty or cess taxable in the year in which such interest is received
  6. borrowing cost incurred on general purpose borrowings needs to be capitalized to the cost of qualifying assets as per normative formula prescribed in ICDS IX only if qualifying assets require 12 months or more for their acquisition, construction or production.

Changes have also been introduced in Tax Audit Report for including ICDS related disclosure requirements and for quantifying adjustment to profits or loss for complying with the ICDS.

Nangia's take

Notification deferring the ICDS as promised by the CG by way of the Press Release clears the ambiguity with respect to the binding nature of the Press Release which preceded the Notification and provides certainty to the taxpayers, yet again depicting the focus of the present Government.

Further, some of the amendments to ICDS such as restricting capitalization of interest on general borrowing to the assets, which necessarily require period of 12 months or more for its acquisition, construction or production, providing same tax treatment in respect of forex fluctuation for integral and non-integral operations is welcome.

Source: Notification No. 86/ 2016 dated 29 September 2016

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