Central board of direct taxes has issued discussion paper on accounting standard for the option and reviews by the stake holders. However it is accepted by the finance minister Mr. Pranab Mukharjee. Full issue of Discussion paper is as under.
DISCUSSION PAPER
ON
TAX ACCOUNTING
STANDARDS
OCTOBER 2011
Government of India
Ministry of Finance
Department of Revenue
Central Board of Direct Taxes- 1 -
1. Background
1.1 Section 145 of the Income-tax Act, 1961 („the Act‟) provides that the method
of accounting for computation of income under the head “Profits and gains of
business or profession” and “Income from other sources” can either be the cash or
mercantile system of accounting. The Finance Act, 1995 empowered the Central
Government to notify Accounting Standards for any class of assessees or for any class
of income. Explaining the reason for introduction of this provision, it was stated that
there is flexibility in the standards issued by the Institute of Chartered Accountants of
India (ICAI) which makes it possible for an assessee to avoid the payment of correct
taxes by following a particular system and therefore, there is an urgent need to
standardize one or more of the alternatives in various standards so that income for tax
purpose can be computed precisely and objectively.
1.2 Since the introduction of these provisions, two Accounting Standards relating
to disclosure of accounting policies and disclosure of prior period and extraordinary
items and changes in accounting policies have been notified. In July 2002, the
Central Government had constituted a committee on formulation of Accounting
Standards under the Act [„the Committee (2002)‟].
1.3 The Committee (2002) submitted its final report in November 2003 which
contained the following main recommendations:
(i) It would be impractical for a tax payer to maintain two sets of books of
account – one in accordance with the Accounting Standards issued by the
ICAI and another set in accordance with the Accounting Standards to be
notified under the Act. The Committee (2002), therefore, recommended that
the Accounting Standards issued by the ICAI should be notified under the Act
without any modifications.
(ii) 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.- 2 -
1.4 The recommendations of the Committee (2002) could not be implemented
because of the following:-
(i) The implementation of the recommendation of the Committee (2002) would
have required extensive amendment to the Act resulting in complexity and
litigation, and would have negated the concept of notification of accounting
standards under the Act to provide certainty.
(ii) As the Accounting Standards issued by ICAI keep on evolving /changing by
way of issue of new standards, interpretation and revision, it would have been
cumbersome for the Ministry of Finance to keep track of all changes in the
Accounting standards issued by the ICAI and to move simultaneous
amendments to the Act.
1.5 There have been significant developments since the Committee (2002)
submitted its report, notable among them are:
(i) The Government of India, through the Ministry of Corporate Affairs (MCA),
has notified twenty eight Accounting Standards issued by the ICAI, under the
Companies Act, 1956.
(ii) The Government of India has decided to converge Indian Accounting
Standards with the International Financial Reporting Standards (IFRS). In
February, 2011, the MCA, being the nodal agency for this convergence, has
placed thirty five Indian Accounting Standards converged with International
Financial Reporting Standards (termed as IND AS) on its website.
(iii) In the absence of notification of Accounting Standards under the Act,
uncertainty and litigation continues on various accounting related issues such
as accounting for construction contracts, foreign exchange fluctuations and
government grants.- 3 -
2. New Accounting Standards Committee
2.1 The Central Board of Direct Taxes (CBDT) constituted a new Accounting
Standard Committee („the Committee‟) comprising of departmental officers and
professionals vide Order No. 134/48/2010-SO (TPL) dated 20
th
December 2010. The
terms of reference of this Committee are as under:
i) to study the harmonization of Accounting Standards issued by the ICAI
with the direct tax laws in India, and suggest Accounting Standards
which need to be adopted under section 145(2) of the Act along with
the relevant modifications;
ii) to suggest method for determination of tax base (book profit) for the
purpose of Minimum Alternate Tax (MAT) in case of companies
migrating to IFRS (IND AS) in the initial year of adoption and
thereafter; and
iii) to suggest appropriate amendments to the Act in view of transition to
IFRS (IND AS) regime.
3. Main recommendations of the Committee
3.1 The Committee submitted its Interim Report in August 2011. The main
recommendations of the Committee with regard to the first term of reference are as
under.
3.2 Since the Accounting Standards to be notified under section 145(2) of the Act
would need to be in harmony with the provisions of the Act, the Accounting
Standards issued by the ICAI cannot be notified without modification. The notified
Accounting Standards should provide specific rules, which would enable computation
of income with certainty and clarity. To ensure horizontal equity and uniformity, the
notified Accounting Standards would also need elimination of alternatives, to the - 4 -
extent possible. Accordingly, separate Accounting Standards should be notified under
Section 145(2) of the Act.
3.3 It would be burdensome for affected tax payers to maintain two sets of books
of account i.e. one in accordance with the Accounting Standards issued by the
ICAI/notified under the Companies Act, 1956; and another in accordance with the
Accounting Standards notified under the Act. Accordingly, the Accounting
Standards notified under the Act should be made applicable only to the computation
of taxable income and a taxpayer should not be required to maintain books of account
on the basis of Accounting Standards notified under the Act.
3.4 Two different sets of Accounting Standards may cause confusion for taxpayers
and other stakeholders. Accordingly, the Accounting Standards notified under the
Act should be termed as “Tax Accounting Standards” (TAS) to distinguish them from
the Accounting Standards issued by the ICAI/notified under the Companies Act,
1956.
3.5 Since the TAS are based on the mercantile system of accounting, the TAS
should be applicable to all tax payers who follow the mercantile system of accounting,
and should not be applicable to those taxpayers who follow the cash basis of
accounting.
3.6 As the TAS are intended to be in harmony with the provisions of the Act, it
should be expressly provided in the TAS, that in case of conflict, the provisions of the
Act shall prevail over the TAS.
3.7 Currently, the starting point for computation of income under the head
“Profits and gains of business or profession” and “Income from other sources” is the
income as per the financial statements. Since the provisions of the TAS may not be
the same as the corresponding provisions used for preparation of the financial
statements, a reconciliation between the income as per the financial statements and
the income as computed per the TAS should be presented. - 5
-
-
4. Draft TAS
4.1 Draft of the TAS on Construction Contracts and Government Grants,
recommended by the Committee, are annexed hereto. Draft of other TAS will be
issued for comments/suggestions by all stakeholders in due course.
4.2 Comments/suggestions are invited on the recommendations of the Committee
and draft of the TAS annexed hereto. The comments/suggestions may be e-mailed at
dirtpl3@nic.in by 11
th
November, 2011
