TAX ACCOUNTING STANDARD (TAS) THE CHAMBER OF TAX CONSULTANTS

Transcription

1 Representation on TAX ACCOUNTING STANDARD (TAS) THE CHAMBER OF TAX CONSULTANTS

2 THE CHAMBER OF TAX CONSULTANTS MANAGING COUNCIL President Manoj Shah Vice President Yatin Desai Hon. Secretaries Hitesh Shah Paras Savla Hon. Treasurer Avinash Lalwani Immediate Past President Parimal Parikh Members Ajay Singh Apurva Shah Ashit Shah Ashok Sharma Atul Bheda Haresh Kenia Hinesh Doshi Jayant Gokhale K. Gopal Keshav Bhujle Ketan Vajani Kishor Vanjara Ninad Karpe Vijay Bhatt Vipul Choksi Vipul Joshi Yatin Vyavaharkar Special Invitees Bhavesh Vora Mahendra Sanghvi Sujal Shah V. H. Patil LAW & REPRESENTATION Chairman Vipul Joshi Co-Chairman Mahendra Sanghvi Vice-Chairman Shailesh Bandi Ex-Officio Manoj Shah Yatin Desai Convenors Krish Desai Amrit Porwal Past President V. P. Verma Ajit Rohira Advisor Y. P. Trivedi K. K. Ramani Office Bearers Hitesh Shah Paras Savla MG Council Members Apurva Shah Jayant Gokhale Members Atul Suraiya C. N. Vaze Devendra Jain Durgashankar Sharma Kiran Shah Manish Gadia Mayank Shah Nitin Potdar Niranjan Doshi Nikita Badheka Rajen Gada Sunil Ramani Shailesh Sheth Shilpa Sharma Sanjay Buch Shruti Shah Sharad Abhyankar V. R. Ghelani

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5 Representation on Tax Accounting Standard (TAS) GENERAL PREAMBLE At the outset, we strongly represent that there is no necessity to introduce TAS at present because its introduction will result in conflict with the existing Tax Laws, unsettling the settled positions under, / tax laws, will generate avoidable Tax litigations. It will also create harrasment of doing unnecessary reconciliation between Tax Accounting Standard and Books of Account and would also increase the cost of compliance. However, we highlight some of the points in details in this regard. a.) Concept of Materiality not recognised: There are many events in business which are trivial or insignificant in nature. The cost of recording and reporting such events cannot be justified by the usefulness of the information derived. Materiality concept holds that items of small significance need not be given strict theoretically correct treatment. For example, a stapler costing around Rs.50 may last for three years; however, the efforts involved in allocating its cost over the three year period is not worth the benefit that can be derived from this operation. Since the item obviously is immaterial when related to overall operations, the cost incurred on it may be treated as the expense of the period in which it is acquired. Materiality is a subjective concept. Whether financial data is material or not depends not just on its users but on its purpose. Non recognisation of materiality concept will increase the cost of compliance and result in harassment to assesses. b.) Concept of Prudence not recognised: We have to make estimates requiring judgment to counter the uncertainty. While making judgment we need to be cautious and prudent. Prudence is a key accounting principle which makes sure that assets and income are not overstated and liabilities and expenses are not understated. Ignorance of prudence will result in pre-mature taxation of income which is not really earned and would result in improper taxation and may create conflicts with charging sections of Income Tax Act. Page 1 of 21

6 GENERAL PREAMBLE c.) Separate books of Accounts for TAS: Though it has been stated that no separate books are required to be maintained under income tax laws, implementing the TAS would be impossible without maintenance of separate books of account under tax laws, particularly where there are many accounting standards and conflicting treatments between accounting standards issued under Companies Act, 1956 / by ICAI and those proposed as TAS under Income Tax Act, Reconciling the income as per the books of accounts maintained as per AS (ICAI) and the income computed as per TAS will become cumbersome exercise. We recommend harmonization of AS issued by ICAI with TAS proposed to be issued under Income tax Act, 1961 Further appropriate legislative amendments should be made to the Act to prevent any scope for leakage of revenue on account of notification of Accounting Standards issued by the ICAI. d.) Well settled Judicial Pronouncement: As on today, concerned issues are being resolved smoothly in absence of TAS by courts. Therefore, TAS will bring confusions and ambiguity on well settled issues. Further, it will create conflicts on well settled issues. e.) Threshold limit for Applicability: Notwithstanding what is stated above, if a TAS is nonetheless required to be issued, it needs to have a threshold limit for non applicability, so that smaller assesses are not required to go through such cumbersome exercise and strict compliance. f.) Modification in Nomenclature: The nomenclature given as Tax Accounting Standard is not proper and the word Accounting is required to be deleted as it implies that it is required to be accounted, whereas as stated in preamble no separate books of accounts are required to be maintained and it is applicable to only computation of total income. Therefore, the nomenclature should not include the word Accounting. Page 2 of 21

7 GENERAL PREAMBLE g.) Non-Applicability: TAS should not be made applicable to Presumptive incomes, Shipping Companies, Insurance Companies, etc to the extent they are covered by the special provisions of the Income tax Act. We are of strong opinion that there is no need for introduction of TAS. Even if one wants to introduce an uniform mechanism for computation of income, the same can be introduced through Income Tax Rules. Nonethless, if at all one wants to introduce TAS then to a criteria as suggested below needs to be specified so as to avoid process compliance by small tax payers who may not be equipped to that extent and for whom such compliance may not be economically viable. Suggested criteria for applicability of Tax Accounting Standards: (i) Enterprise which are listed on recognized stock exchange whether in India or outside India (ii) Enterprise which are in the process of listing their equity or debt securities as evidenced by Board of Directors in this regard. (iii) Banks including Co-operative Banks (iv) Financial Institution, Public Sector Undertaking, enterprise carrying on insurance business (v) Assessee s having turnover of Rs.100 crores or more. Notwithstanding what is stated above, specific representation along with suggestions and justification thereof on the each of TAS is made separately hereunder:- Page 3 of 21

8 Sr. No. 1 As per para 1 This Accounting Standard deals with significant accounting policies. DISCLOSURE OF ACCOUNTING POLICIES As per the Draft Suggestion Justification Suggested wordings This Accounting Standard deals with disclosure of significant accounting policies for the purpose of tax computation This Standard is a disclosure Standard. As such policies are governed by the respective standard and therefore the suggested wordings. 2 Wording of para 4 are the accounting policies refer.adopted by a person Suggested wording of para 4 are the accounting policies refer.adopted by a person for the purpose of computation of income as per the Tax Accounting Standards TAS are only for specific purpose of preparation of tax computation and also the policies have to be in line with the Tax Accounting Standards and therefore the suggested wordings. 3 The wordings of para 5 are Accounting policies adopted by a person.profes sion or vocation Suggested wordings are Accounting policies adopted by a personshall be such as to represent true and fair view of income of the business or profession or income from other sources as per TAS (1) It does not deal with Balance Sheet, It only deals with computation of income. Therefore state of affairs is not required. (2) Profession includes vocation as defined under the Act and hence the word vocation be deleted (3) As pre preamble this Standard is for computation of business income and income from other sources and therefore the suggested wordings. Page 4 of 21

9 DISCLOSURE OF ACCOUNTING POLICIES 4 As per para 5(i), The treatment and not merely by the legal form This clause needs to be deleted. To avoide unnecessary litigations. 5 An Accounting policy shall not be changed without reasonable cause. An accounting policy shall not be changed without reasonable cause. Grammatical correction. 6 5(ii) marked to market los Marked to market loss/gain or of such loss /gain is in In equity, when loss is not allowed gain should also be not subject to tax. Page 5 of 21

10 VALUATION OF INVENTORIES Sr. No. As per the Draft Suggestion Justification 1. Measurement : Para 3: Inventories shall be valued at cost or net realizable value, whichever is lower, except in case of a service provider, the inventories of services shall be valued at cost. The Sentence shall be re drafted as Inventories shall be valued at cost or net realizable value, whichever is lower, except in case of a service provider, the inventories for rendering of services shall be valued at cost. To remove the anomaly for valuation of inventories for rendering of services. 2. Cost of Inventories :- Formulae Cost of inventories to be determined on First in First out, Weighted Average Cost Formula, and Retail method. The technique of measurement of the cost of inventories on the basis of standard cost to be included. In certain type of manufacturing industries, such as batch production, it is practically difficult to measure cost of inventory on FIFO or Weighted Average Cost Formulae. Standard cost method of measurement should be permitted which results approximate to the actual cost. Page 6 of 21

11 EVENT OCCURING AFTER THE PREVIOUS YEAR Sr. No. As per the Draft Suggestion Justification 1 Para 3 Adjustment to assets, liabilities, income or expense shall be made for events occurring after the previous year that provide additional information materially affecting the determination of the amounts relating to conditions existing at the end of the relevant previous year 2 Para 4- Following disclosure shall be made in respect of each class of provision 3 Para 4(a) a brief description of the item of income, expense, asset or liability recognized on account of events occurring after balance sheet date (b) amount recognized Event occurring after the end of the previous year that provide additional information materially affecting the determination of the amounts of asssets, liability, income or expense relating to the conditions existing at the end of the relevant previous year, the effects of such events be shall be given in the comoutation of income Alternatively Only adjustments to income and expenses be given effect in computation of income Following disclosure shall be made in respect of adjustments made to income and expenses for the purpose of computation of income each adjustment. (i) A brief description of adjustments affecting item of income, expense, asset or liability on account of events occurring after the end of previous year. (b) amount adjusted For event occurring after the end of previous year, the word adjustment is more appropriate Suggested wordings to have consistency with the title of the Standard. Page 7 of 21

12 PRIOR PERIOD ITEMS Sr. No. As per the Draft Suggestion Justification 1. It deals with treatment of prior period expense only Para 2 AS 5 deals with prior period items i.e. income and expenditure of a prior period.. To be fair to tax payer it should also consider disallowance of prior period item on Net basis, in case of there is related income pertaining to prior period expenses. TAS should be comprehensive and therefore it should cover treatment for prior period income. For working out taxable income it may be fair to work out prior period income and expenditure on net basis. 2. Para No. 3 (2) unless the person proves that such expense accrued during the said previous year. To be modified as follows : unless such expense is crystallised during the said previous year. the person proves is a harsh word. If it is concluded that expense was crystallised during the previous year, it should be treated as a current year expense. 3. Para No. 3 (3) accounting estimate or change in accounting policy shall not constitute. 4. Para No. 4 Prior Period Items shall be disclosed with refence to nature and amount.. The situation may arise when there is a prior period charge due to change in accounting policy. As suggested in Sr 1. above prior period item is to be considered and therefore disclosure for the same.. Prior Period items falling in para 3(2) of TAS should only be disclosed as that is relevant. Page 8 of 21

13 PRIOR PERIOD ITEMS There should be some threshold limit for treating item as prior period expense. We suggest threshold limit of Rs.100,000 or 0.1% of turnover whichever is lower may be considered.. To avoid cumbersome exercise of identifying each and every prior period expense, this is suggested. Page 9 of 21

14 REVENUE RECOGNITION Sr. No. As per the Draft Suggestion Justification 1. Para No. 1 (2) It does not deal with any aspects of revenue recognition which are dealt with by other TAS. Neither this TAS nor any other TAS covers revenue arising from insurance contracts. TAS should mentioned that revenue recognition for insurance contracts will be based on IRDA Regulation. This is required to take care of revenue earned by insurance companies, including reliance on actuarial valuation. 2. Para No. 2 (1) (a) Definition of Revenue It should further add that in an agency relationship, the revenue is the amount of commission and not the gross inflow of cash, receivable or other consideration. This will cover agents and brokers which are not required to book revenue on a gross basis. This will have impact on applicability of tax audit. 3. Para No. 3.. property in the goods for a price or all significant risk and reward of ownership have been transferred to the buyer.. Property in the goods for a consideration and all significant risk and reward of ownership have been transferred to the buyer.. Price can only be in a monetary terms while consideration can also be in kind. As per AS 9 unless significant risk and reward of ownership have been transferred, there is no need to recognise the revenue. If TAS wording is not changed, recognition of revenue will be on transfer of property or transfer of significant risk and reward of ownership whichever is earlier. Page 10 of 21

15 REVENUE RECOGNITION 4. Para No. 4.. revenue recognition in respect of such claim shall be postponed to the extent of uncertainty involved. The postponement of revenue is restricted only to two items i.e. claim for escalation of price and export incentives... revenue recognition in respect of such claim shall be postponed to the period in which ultimate collection is reasonably certain. The postponement should be made applicable to any revenue where the collection is not reasonably certain. If TAS wordings are retained it will mean that revenue may have to be booked on the basis of percentage of certainty of collection. To make it clear, the wordings change is required. If revenue is booked for transactions where collection is not reasonably certain, it may amount to recognition of contingent asset and will be against the basic principle of accounting. 5. Para No. 5 It provides that for booking of revenue from service transactions it is mandatory to use proportionate completion method. AS 9 gives alternative to either used proportionate completion method or completed service contract method. For certain services it will be difficult to apply percentage completion method, as it will be difficult to estimate percentage of work completed. For certain service contracts, TAS should allow completed service contract method. Percentage completion method may be made mandatory for fixed price/period contracts, which can be accounted on the basis of period elapsed. Revenue from many services may be linked to certain milestone provided in the contract. In such cases, it is difficult to apply percentage of completion method. For example, Merchant banking activity, Repair of machinery,legal practioners, consultancy services etc. Page 11 of 21

16 REVENUE RECOGNITION Sr. No. As per the Draft Suggestion Justification 6. Para No. 6.. discount or premium on debt securities held is treated as though it were accruing over the period of maturity. discount or premium on issuance of debt securities is treated as if it were accruing over the period of maturity.. Definition of cost for the purpose of capital gain needs to be modified accordingly. To be inline with the present scenario treating discount and premium on issuance of debt securities to arrive at total income. 7. Para No. 9 It is important to clarify as to where the disclosure is required, as financial statements disclosure will be based on AS. 8. Para No. 9(d).. disclosure is required for the amount of retentions. (I). recognised profits recognised losses) and (less The word less should be removed. After the word profit, word loss needs to be inserted. 9. Para No. 12 & 13 As per wording given none of the improvements or repairs will get qualified as revenue expenditure. It is important to mention that if there is no increase in the future benefits from the existing assets, beyond what was originally envisaged, it shall be charged to revenue. Disclosure may form part of form 3CD where tax audit is applicable. For other assesses, it may be exempted. s. All repairs will have future benefit and it will not be correct to capitalised all the expenditure on repairs and improvements. Page 12 of 21

17 REVENUE RECOGNITION Sr. No. As per the Draft Suggestion Justification 10. Para No. 14. which becomes an integral part of the existing tangible assets is to be added to its actual cost. TAS should specify that it will be treated as an addition of the previous year in which such expenditure is incurred. 11. Para No. 15 & 19 There is no need to maintain tangible fixed assets register, where concept of block of asset is involved. It is suggested that the details mentioned in these paras may be provided only in the year of addition to the fixed assets. 12. Para No. 23. where these conditions are met, the subsequent expenditure shall be added to the actual cost of the intangible assets. Instead of actual cost, the word block should be replaced. In the block concept, there can not be any addition to the actual cost of the original asset. By the present wording it may be construed that depreciation shall be calculated retrospectively. It will be cumbersome to maintain fixed assets register for all the assets in the concept of block of asset. To be in line with Income Tax Law. Page 13 of 21

18 ACCOUNTING FOR TANGIBLE FIXED ASSETS Sr. No. As per the Draft Suggestion Justification 1. Para No. 2 (1)(a). being land, building, machinery, plant or furniture held. It should be changed to. being land, building, furniture & fitting, machinery and plant, ships held. It should match with Appendix I of the income tax rules which provides different blocks. If the wordings are not same, it may create difficulty in capitalisation. 2. Para No. 2 (1)(b) Fair Value. arm s length transaction. It should be changed to Fair Value. arm s length transaction, who are fully informed and are not under any compulsion to transact. There is no need to change definition of fair value given in AS Para No. 6 After the para, following should be added impact of the above changes should be adjusted from the opening block of the respective asset in the previous year in which such changes arises. 4. Para No. 8 (i)the expenditure incurred upto start up and commissioning shall be capitalized exceptexpenditure incurred at the project stage when there is abnormal delay in starting of commercial production. Clarification is required as the effect is not expected to be given retrospectively. AS 10 covers the same and specifies that such cost should be charged off. Page 14 of 21

19 ACCOUNTING FOR TANGIBLE FIXED ASSETS (ii) The sentence The expenditure incurred after the plant has begun commercial production, i.e., production intended for sale or captive consumption, shall be treated as revenue expenditure needs to be deleted and instead the following sentence to be inserted. The expenditure after the completion of test run of the plant shall be treated as revenue expenditure 5. Para No. 10 & 11. whichever is lower. (a) Word Market value needs to be deleted (b)it should be changed to. whichever is more clearly evident. (a) Fair value is broader term and already includes fair market value (b) There is no reason for accounting at lower value. Further, such accounting may create issues in arriving at profit or loss on sale of asset / security given up. Page 15 of 21

20 ACCOUNTING FOR TANGIBLE FIXED ASSETS Sr. No. As per the Draft Suggestion Justification 6. Para No. 12 & 13 As per wording given none of the improvements or repairs will get qualified as revenue expenditure. It is important to mention that if there is no increase in the future benefits from the existing assets, beyond what was originally envisaged, it shall be charged to revenue. All repairs will have future benefit and it will not be correct to capitalised all the expenditure on repairs and improvements. 7. Para No. 14. which becomes an integral part of the existing tangible assets is to be added to its actual cost. TAS should specify that it will be treated as an addition of the previous year in which such expenditure is incurred. In the block concept, there can not be any addition to the actual cost of the original asset. By the present wording it may be construed that depreciation shall be calculated retrospectively. 8. Para No. 15 & 19 There is no need to maintain tangible fixed assets register, where concept of block of asset is involved. It is suggested that the details mentioned in these paras may be provided only in the year of addition to the fixed assets. It will be cumbersome to maintain fixed assets register for all the assets in the concept of block of asset. Page 16 of 21

21 LEASES Sr. No. As per draft Issues Suggestions Justifications 1. Para 5 : Classification of a lease agreement shall be same for the lessor and the lessee and they shall execute a joint confirmation regarding such classification.the present requirement does not take care of situation (a) TAS should provide for joint declaration for such changes The present requirement does not take care of situation where subsequent to initial agreement lease terms are substantially modified which may result in change in original classification.. 2. Para 3(2) (a) since there is provision in TAS of joint declaration for classification of lease, this deeming provision is not required. Alternatively, the factors indicated in this para may be considered while entering into joint declaration for lease agreements. The deeming provision for finance lease may result in a different classification than that of joint declaration. 3. Under Para 10 of TAS (LS): Lease payments under an operating lease shall be recognized as an expense on straight line basis over the lease term and; (i) In case of non cancellable operating lease, lease payments shall be recognized as an expense on straight line basis over the lease term It is not correct to apply staright line basis for the full period of lease for cancellable lease. Page 17 of 21

22 LEASES Para 15 of TAS(LS): Lease income under an operating lease shall be recognised as an income on a straight line basis over the lease term. The lease income/ payments in the case of operating lease is to be recognised only on a straight line basis over the lease term. However, in cases where the lease agreement provides for periodic increase in lease rentals over the lease term, as per the treatment prescribed under TAS(LS), the assessee would be required to offer for tax such income which has not even arisen to him in the given previous year. Similar issues may arise where the lease agreement contains an escalation or similar clause. (ii) In case of cancellable operating lease, lease payments shall be recognized as an expense on a syatematic basis over the lease term. Similar changes are required under para 15 for lease income accounting. Page 18 of 21

23 LEASES 4. Para 14 The balance of the receivable at the end of the lease term shall be treated as the cost of acquisition or actual cost of the asset given under finance lease at the time of end of the lease term. It is recommended at Para 14 of TAS(LS) be deleted Since the lessor is required to record the finance lease as a sale in his books at the inception of the lease itself, the question of balance, if any, in the receivable account of the lessor at the end of the lease term being regarded as the cost of acquisition / actual cost of such leased asset (which does not at all appear in the books of the lessor upon the inception of the lease) does not arise. Accordingly, the provision contained in Para 14 of TAS(LS) cannot be given effect to. [In fact, when at the inception of the finance lease, the lessor is required to offer the gains as his income, it is only fair that any unrecoverable amount lying in the receivable account of the lessor at the end of the lease term should be allowed as a loss to the lessor.] Page 19 of 21

24 INTANGIBLE ASSETS Sr. No. As per the Draft Suggestion Justification 1. Para No. 1 Item no. (i) goodwill should be excluded so that acquired goodwill can be treated as intangible assets. 2. Para No. 2 (1)(a) It should be provided that computer software will not be intangible assets. 3. Para No. 2(1)(g) The word systematic may be removed from the definition of depreciation. AS 10 covers acquired goodwill other than on merger accounting. If expenditure is incurred for purchase of goodwill, it will be fair to allow the same to be capitalised. It is covered in depreciation rate - Appendix I as part of tangible assets. Income Tax Rules provide specific rate of depreciation for intangible assets and it may not be considered as systematic allocation. In most of the cases, systematic allocation will be in the books of account and will not match with Income Tax Rules. 4. Para No. 2(1)(i). It should be changed to Fair Value. arm s length transaction, who are fully informed and are not under any compulsion to transact 5. Para No. 2(1)(j)...net of any accumulated depreciation. It should be changed to net of depreciation allowed/allowable in income tax. Required to be in line with the provision of income tax. Page 20 of 21

25 INTANGIBLE ASSETS 6. Para No. 4 Clarification is required for treatment of computer software on stand alone basis. 7. Para No. 5 The reference of goodwill in the para should be removed, so that on the acquired goodwill depreciation can be claimed. At present it is getting covered under Tangible Fixed Assets. Acquired goodwill should be considered as depreciable asset. 8. Para No. 14 After the para, following should be added impact of the above changes should be adjusted from the opening block of the respective asset in the previous year in which such changes arises. 9. Para No. 23. where these conditions are met, the subsequent expenditure shall be added to the actual cost of the intangible assets. Instead of actual cost, the word block should be replaced. To be in line with Income Tax Law. Page 21 of 21

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30 ABOUT CTC The Chamber Of Tax Consultants