Income Computation and Disclosure Standards. CA Parul Mittal

Transcription

1 Income Computation and Disclosure Standards CA Parul Mittal

2 ICDS Overview In Finance Act 2014, vide amendment made in section 145(2), power granted to Central Government to notify income computation and disclosure standards ( ICDS ), substituting accounting standards A committee was formed that issued 14 accounting standards in 2012, subject to public comments On March 31, 2015, vide Notification No. 32/ 2015, Central Government notified 10 out of 14 draft ICDS effective from April 01, 2015 Vide Press Release dated July 6 th, 2016, CBDT deferred by one year. Accordingly, ICDS applicable from April 01, 2016 i.e. for computing Advance tax liability from previous year onwards (Assessment Year ) CBDT rescinded old ICDS through Notification No. 86/ 2016 dated September 29, 2016 and issued revised ICDS vide Notification No. 87/ 2016 and amended Tax Audit Form 3CD Per revised ICDS, no change in ICDS I (Accounting policies), ICDS VII (Government Grants) and ICDS X (Provisions, Contingent Liabilities and Contingent Assets) CBDT issued FAQs dated March 25,

3 ICDS Overview Section 145(2) Effective date w.e.f. AY Income heads covered No. of standards Disclosure requirements -PGBP and other sources -If accounts are on mercantile basis 10 vide CBDT Notification dated September 29, 2016 Para 13 of Form 3CD & ITR Individuals and HUF - ICDS applicable only if covered under tax audit provisions u/s 44AB Whether provisions of ICDS IV applicable for computing turnover threshold of INR one crore? 3

4 ICDS Overview Disclosure under clause 13 of TAR (d) Whether any adjustment is required to be made to profits or loss for complying with ICDS notified u/s 145(2) (e) If yes (f) Disclosure as per ICDS* - No disclosure requirements for ICDS VIII Securities and ICDS VI Change in Forex ICDS* Name of ICDS Increase in profits Decrease in profits Net (Rs.) Description I II III IV V VI VII VIII IX Accounting Policies Valuation of Inventories Construction Contracts Revenue Recognition Tangible Fixed Assets Changes in Foreign Exchange Rates Government Grants Securities Borrowing Costs X Provision, Contingent liab & Assets 4

5 ICDS Consequences of non-compliance Section 145(3) AO has the power to make best judgement assessment under section 144 if he is not satisfied about the :- correctness or completeness of the accounts of the assessee ; or method of accounting is not regularly followed ;or Income not computed as per ICDS Hence, on not complying with ICDS, the AO can ignore the books of the assessee and do a best judgement assessment. Therefore, in case of any deviation from the ICDS, there should be a proper disclosure giving the reasoning for such deviation in the computation. Key concerns/ points to ponder ICDS are authoritative guidance. Non adherence of single ICDS leads to BJA u/s 144? 5

6 ICDS II Inventory Valuation Inventory shall be valued at cost or net realizable value, whichever is lower Three methods of valuation recognized: First-in first-out; Weighted average Retail method Inventory valuation and disclosure mandatory for service providers. Para 6 states that cost of services shall consist of labour, other cost of personnel and attributable overheads* *As per erstwhile ICDS II, a service provider needed to maintain inventory record for WIP. However, ICDS IV read with ICDS III, service providers are required to recognize revenue on POCM basis. Accordingly, as per revised Notification 87/ 2016, the revised ICDS has done away with this requirement for a service provider to value inventory of work in progress. ICAI affirms this view in its guidance note 6

7 ICDS II Inventory Valuation Revised ICDS II (vide Notification 87 of 2016) recognizes both standard costing method** or retail method*** for measuring cost of inventories if the result approximately arrives at the actual cost. Method of valuation once adopted should not be changed without reasonable cause. ** Erstwhile ICDS de-recognized standard costing method of valuation. Revised ICDS allow standard costing method if results approximates actual cost. Adequate disclosure should be made confirming that standard cost approximates actual cost ***Per revised ICDS, an average percentage of each retail department is to be used while applying retail method for large number of rapidly changing items with similar margins 7

8 ICDS II Inventory Valuation In case of newly commenced business, value of opening inventory shall be cost of available inventory No impact on conversion of capital asset into stock in trade for commencement of business - section 45(2) ICDS II recognizes inventory to be valued at Net Realizable Value ( NRV ) on dissolution of partnership firm/ AOP/ BOI, with or without discontinuance of business. Accordingly, profit/ loss should be chargeable to income tax. However, in cases where dissolution is followed with continuation of business, since inventory will be valued on NRV, the differential profit will be offered to tax, creating artificial income and leading to generation of timing difference Key concerns/ points to ponder Taxpayers to maintain parallel inventory record Firm/ AOP/ BOI - Inventory valuation based on NRV on dissolution, may give rise to deferred tax assets if business continues and the NRV is more than actual inventory cost. Under AS, inventory valued at cost and as per ICDS, it is valued at NRV, leading to differential profit being subject to tax*. Besides, no specific provision for allowing NRV as cost to successor of business *Contrary to Supreme Court decision in case of Shakti Trading Co. (250 ITR 871) wherein it was held that if business continues after dissolution, inventory to be valued at NRV or cost, whichever is less. To be seen whether SC rulings prevail over ICDS 8

9 ICDS IV Revenue Recognition Applicable on recognition of revenue from: Sale of goods; Rendering of services; and Interest, royalty and dividend Revenue recognized on POCM basis on the reporting date. ICDS IV does not apply on revenue dealt by other ICDS Sale of goods - Revenue recognized when property in goods and all risks and rewards of ownership are transferred along with reasonable certainty of its ultimate collection of revenue Service transaction - As per the revised ICDS IV, following points should be applied for recognizing service revenue: Where services are provided by an indeterminate number of acts over a specific period of time, revenue may be recognized on a straight line basis over that period Revenue from service transactions recognized by POSM method, in accordance with ICDS III Revenue from service contracts of not more than ninety days may be recognized on completion/ substantial completion of contract Lack of clarity on transitional provisions whether service contracts commenced by not completed before April 01, 2016 shall be recognized based on ongoing accounting principles or POCM? Dividend revenue recognized from date of declaration of dividend Royalty revenue recognized on the basis of terms of agreement unless some more appropriate basis is identified on basis of substance of transaction Interest revenue recognized on time basis not on due basis. Per revised ICDS IV, interest on refund of any tax, duty or cess taxable on receipt basis 9

10 ICDS IV Revenue Recognition ICDS IV applicable to income assessable on both net basis and gross/ presumptive incomes with specific sections under the Act. E.g.: interest, royalty and FTS for non-residents u/s 115A also being covered Key concerns/ points to ponder Postponement of revenue recognition postponement of revenue recognition due to uncertainty is restricted to claims for price escalation and export incentives Interplay of ICDS IV and MAT provisions may lead to double taxation Example: In a project spanning 3 years with revenue of INR 600 each year will result in taxation of INR 200 in each of 3 years under ICDS IV and taxation on INR 600 in 3 rd year under MAT provisions, resulting in the taxpayer paying tax on taxable income of INR 1,000 ( ) Interest income time based recognition conflicting with legal precedents* which advocate taxation of interest on maturity in case of time deposits * SC in case of ED Sasson & Co. (26 ITR 27), Godhra Electricity Co. ltd. (225 ITR 746) 10

11 ICDS VI Effects of changes in foreign currency rates ICDS VI does not apply to banks and other authorized dealers which offer derivative products to their customers Provisions of ICDS VI subject to section 43A of Income Tax Act and Rule 115 of Income Tax Rules Monetary items Monetary items are money held and assets to be received or liabilities to be paid in fixed or determinable amounts of money. E.g.: receivables, payables,. ICDS VI allows exchange difference on monetary items to be transferred to revenue account (subject to section 43A of the Act pertaining to foreign exchange difference on acquisition of imported asset). MTM losses not allowed - Gains/ losses arising from foreign exchange contracts in nature of trading or speculation purposes should be recognized on settlement since mark to market gains or losses are unrealized in nature Non integral foreign operation As per revised ICDS Notification 87 dated September 29, 2016, the concept of integral and non-integral foreign operations has been removed Treatment of opening balance of FCTR on April 01, 2016 the opening balance of FCTR may have accumulated over several years and should not be taxable in entirety in FY

12 ICDS IX Borrowing Costs Qualifying asset defined in para 2(b) to include: Tangible assets land, plant etc. Intangible assets - know-how, patents, copyrights, commercial rights etc. Inventory that requires period of 12 months or more time period for being in saleable condition Exchange difference not to be included as part of borrowing cost Time of commencement of capitalization of borrowing cost: For specified borrowing from date on which funds are borrowed For general borrowing from the date on which funds are utilized Valuation of borrowing cost: For specific borrowing actual borrowing cost incurred during the period on borrowed funds For general borrowing specified formula No suspension of capitalization of borrowing cost, even if active development of asset is interrupted Cessation of capitalization: Inventory when all activities necessary for preparing the inventory for sale are complete Other qualifying asset when asset is first put to use; 12

13 ICDS X Provisions, Contingent Liabilities and Contingent Assets Recognition of provision Present obligation as a result of past event; Reasonably certain that outflow of resources embodying economic benefits to settle obligation; Reliable estimate can be made for amount of obligation Contingent Liabilities/ assets Contingent liabilities and contingent assets not to be recognized When it becomes reasonably certain that inflow of economic benefit will arise, asset and related income are recognized in the year in which change occurs Recognition of reimbursement for provisions When it is reasonably certain that reimbursement will be received Retirement benefits CBDT clarified that post retirement benefits like medical benefits covered by AS-15 are not covered Key features: Test of probability (more likely than not) replaced with reasonable certainty Onerous executory contracts not excluded Provision for depreciation/ doubtful debt not covered Provision for impairment of asset not covered 13

14 ICDS X Provisions, Contingent Liabilities and Contingent Assets Provision for warranty allowed as expenditure in following cases: Rotork Controls India P. Ltd. (2009) 314 ITR 62 (SC) Provision to qualify for recognition, there must be a present obligation arising from past events, settlement of which is expected to result in an outflow of resources and in respect of which a reliable estimate of amount of obligation is possible Himalaya Machinery (P) Ltd. Vs DCIT 334 ITR 64 CIT vs Luk India P. Ltd. 52 DTR 117 Siemens Public Communication Networks Limited vs CIT CIT vs Indian Transformers Limited 270 ITR 259 Key issues: Whether insurance claims/ compensation against insurance claim is contingent asset Prohibition of discounting of provision amount (Contrary to IND AS 37) No clarity on restructuring provisions. Act should be referred 14

15 CA Parul Mittal Mobile: Office Address: A-211, Defence Colony, New Delhi D-10, 2 nd Floor, South Extension, Part 2, New Delhi Parul Mittal is a practicing Chartered Accountant, sole proprietorship, Parul Mittal & Associates. She formed the firm in year Parul s experience spans over 12 years, specializing in tax and regulatory advisory with Big4 firms, Ernst & Young and Price Waterhouse Coopers. During her stint with Big4 firms, she worked extensively with domestic and multinational corporations, and handled various kinds of assignments ranging from advisory on accounting and taxation matters to ongoing compliance under direct, international tax, transfer pricing and exchange control. Parul has assisted clients in establishing new business ventures, and assisted them on various initial compliances and entity formation procedures. Parul holds a Bachelors degree in Commerce from University of Delhi and is a qualified Chartered Accountant. 15