FAQ on ICDS, Income Tax

[Deepak Aggarwal]

 A FAQ on ICDS

1. What is ICDS?

The Ministry of Finance has issued ten Income Computation and Disclosure Standards (ICDS), which is a new framework for computation of taxable income. Notification No. 32/2015 [F. No. 134/48/2010- TPL]/SO 892(E) on 31st March 2015. This notification is applicable from Assessment year 2016-17 for both Corporate and Non-Corporate Assessees. Ten ICDS have been notified till date.

2. What is the rationale behind ICDS ?

Starting this year, Companies in India, depending on their scale and listing status would be following 2 different set of Accounting Standards – Ind-AS and AS. In order to ensure tax neutrality, it was deemed fit to draw up an independent Income Computation Standard. These Standards were issued to ensure that regardless of the Financial Reporting framework followed by Companies ( IND-AS or existing Accounting Standards ) tax computations would be guided by a separate set of ICDS.

Applicability

3. Who does it apply to?

It applies to all assesses in relation to their income under the heads “Profit and gains of business or profession” and “Income from Other Sources”.(All assesses following the mercantile system of accounting )

4. Does this apply to non residents?

Yes, ICDS applies to non residents and residents also in so far as they have income under the heads “Profit and gains of business or profession” and “Income from Other Sources”.

5. When is it applicable from?

These standards are applicable for the previous year 2015-16, (Assessment Year 2016-17 onwards

Authority for ICDS

6. Where does this new ICDS flow from ?The Central Board of Direct Taxes (CBDT) has notified these standards under Section 145(2) of the Income-tax Act, 1961 vide “Notification No. 33/2015 [F. No. 134/48/2010-TPL]/SO 892(E) dated 31 March 2015”.

7. What is the content of Section 145 ?

145. (1) Income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee.

(2) The Central Government may notify in the Official Gazette from time to time [accounting standards] to be followed by any class of assessees or in respect of any class of income.

(3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144.

8. Sec 145 speaks of Accounting Standards but these are Income Computation Standards?

The Tax Accounting Standards have been renamed as ICDS suggesting that these standards relate to Income computation and not accounting in a larger context. However Sec 145 confers the power for notifying Accounting Standards and not Income computation standards. There seems to be a dichotomy here.

Advance tax, Tax Audit and MAT- PY - 2015-16

9. Would this impact Income Tax computation for advance tax for Q1 2015-16?

Yes, these Standards being applicable for FY 2015-16 would have to be considered in computing the advance tax for quarter ended Jun 30, 2015.

10. How does ICDS impact MAT?

Minimum alternate tax (MAT) for corporate taxpayers is based on “book profit” determined under current AS or Ind AS, as the case may be. Hence ICDS may not be relevant here except to the extent of determining the tax profit.

11. Will this impact our tax audit?

Yes, as the taxable income is required to be computed in accordance with these standards, they would impact tax audit as well.

Concerns

12. What are the key concerns at a macro level ?

 The ICDS were first drafted with reference to the Indian Accounting Standards as the base. The proposed convergence to IFRS based IND AS would result in conflicts for entities which are required to adopt IND AS.

• The Standards all seem to suggest “advancement” or “pull ahead” of revenue as compared to certain established judgments and may have a cash flow impact

• The computation of net income as per the financial statements and taxable income as computed under ICDS may differ even substantially in certain cases.

• The impact of judicial pronouncements not in line with the proposed ICDS treatment could be an issue

• While separate books of accounts may not be needed, reconciliations between taxable income as per ICDS and net income as per books would be necessitated causing enhanced paper work

• All assesses ( not only Corporate ) will be required to follow these Standards in respect of P & G of Business or Profession and Income from other sources

• Materiality and Prudence are not considered in the ICDS framework

Non Compliance with ICDS

13. What are the consequences if an assessee does not comply with ICDS?

Sec 145 (3 ) speaks of the consequences of non compliance with ICDS requirement as under :

Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee], the Assessing Officer may make an assessment in the manner provided in section 144( bestjudgement assessment )

Going Forward

14. How quickly must we understand ICDS?

These standards are applicable for the previous year 2015-16, (Assessment Year 2016-17 onwards ). Hence understanding and application of these Standards will be important in assessing the amount of Advance tax to be paid for quarter 1

15. What Financial Reporting Standards is ICDS aligned to?

The present set of ICDS is aligned to AS not Ind AS.

16. How will this impact Small entities?

Small entities would find it difficult to ensure compliance with ICDS and the cost of compliance would be enhanced. The challenge for these enterprises would be dual – embracing AS and ICDS

17. How will this impact very large entities?

With Ind – AS notified for implementation from 2016-17 , there could be significant differences between principles adopted in ICDS Vs Ind-AS and hence taxable income as per ICDS and net income as per the financial statements could be subject to significant differences

18. What would be the top concerns in ICDS implementation?

• ICDS do not recognize the concept of prudence, hence there is likely to be an income “pull ahead”

• ICDS could unsettle certain well settled judicial pronouncements which were favourable to the assessee8. Conflicts

19. In case of conflict between ICDS and the Act , which would prevail?

The Income Tax Act would prevail as stated in the preamble to the notification

20. In case of conflict between ICDS and judicial pronouncements what is the impact?

ICDS is prospective (transitional provisions apply ).

21. What about the impact of ICDS ( contrary to judicial precedents ) on existing litigation?

The impact of ICDS on existing litigation needs to be evaluated. Whether such existing litigations arising or likely to arise in respect of periods before the notification of ICDS will be judged against the ICDS framework or existing judicial precedents needs to be watched for

Transitional provisions

22. Are there any transitional provisions in ICDS?

Yes, the ICDS does provide for transitional provisions in respect of financial statement components as at March 31, 2015 (except in the case of ICDS VIII Securities )

23. What is the objective of such transitional provisions?

The transitional provisions are intended to ensure that there are no duplications of allowable items. For instance, if there is a foreseeable loss on a contract that has been already considered for YE March 2015, it cannot be again considered when computing income under percentage completion method.

 

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