Tax
Accounting Standards provide an independent framework for computation
of taxable profits, making the accounting framework redundant. However,
there is no word on calculation of minimum alternate tax.
The
Central Government is empowered under Section 145(2) of the Income-tax
Act to notify accounting standards. However, only two standards relating
to disclosures have been notified till date.
As
a result, there is uncertainty and litigation over various issues where
the tax authority’s views may not be consistent with the guidance in
the Accounting Standards issued by the Institute of Chartered
Accountants of India and the Ministry of Corporate Affairs.
To
address some of these issues, the Central Board of Direct Taxes
constituted the Accounting Standard Committee, whose final
report last month was issued for public comment. The report also
contains drafts of 14 Tax Accounting Standards. Some of the significant
recommendations include:
Provisions of the Act would prevail over TAS when there is conflict between the two.
TAS would apply only to the computation of income and, thus, a taxpayer need not maintain separate books of account based on TAS.
TAS would apply to all taxpayers, and appropriate modifications would be made to return of income and tax audit forms.
The
Act is to be amended to provide clarity on the treatment of goodwill
depreciation arising from amalgamation, and on provision made for
payment of pension in case of retirement or termination of services of
an employee.
As TAS is based on the mercantile system of accounting, it will apply only to taxpayers who follow
that system.
Though TAS is in
harmony with the respective accounting standards, there are
modifications that may significantly impact taxable income of several
companies. Some key areas are discussed below.
Construction Contracts
TAS
mandates use of percentage of completion method for revenue
recognition. Accordingly, the completed contract method is no longer
permitted.
Furthermore, if revenue
recognition conditions are met under TAS, even uncertain revenue must be
recognised in computation of income.
Revenue Recognition
Unlike
AS-9, TAS does not require revenue to be measurable or collectible at
the time of sale (there is an exception for price escalation claims and
export incentives). As such, revenue will have to be recognised when
other conditions of revenue recognition are met under TAS. A
corresponding bad debt expense deduction can be
claimed under the Act.
The committee
has recommended a separate TAS for revenue recognition by real estate
developers until such guidance is issued; diversity may continue in the
manner in which real estate developers apply this TAS.
Forex rates
TAS
provides that all gains or losses on forward exchange, or similar
contracts entered into for trading or speculation, are to be recognised
on settlement as opposed to mark-to-market.
Entities
recognised foreign currency transactions at an average weekly or
monthly rate when the exchange rate did not fluctuate significantly. TAS
has removed this option, providing that all foreign currency
transactions should be recognised at the exchange rate prevalent on the
transaction date.
Furthermore,
exchange differences on transactions that are not an integral part of
the reporting enterprise should be recognised as
income or expense, and not through the foreign currency translation
reserve account as provided in AS-11.
Government Grants
Current
accounting practices permit the capital approach of recording
government grants, whereby these are recorded in the nature of
promoter’s contribution or capital reserve. This is not permitted
under TAS. Grants should be either reduced from the cost of the asset or
recorded as income.
Borrowing Costs
TAS
requires capitalisation of borrowing cost irrespective of the period of
construction. The only exception is for inventories — TAS requires
capitalisation of borrowing costs only for inventories that require more
than 12 months for completion.
TAS provides that income from temporary deployment of specific borrowings is to be treated as income.
Further, under TAS, for loans borrowed specifically for acquisition of
qualifying asset, capitalisation of borrowing costs commences from the borrowing date.
TAS
provides an independent framework for computation of taxable profits,
making the adaptation of accounting framework redundant. The committee
has not commented on calculation of Minimum Alternate Tax.
The
successful harmonisation of TAS with AS, and the achievement of
objectives solely depend on how TAS is implemented by tax authorities
and the judicial system.
(Hiten Kotak is Partner — M&A Tax and Jinesh Shah is Director, KPMG in India.)
No comments:
Post a Comment