24 March 2017
EY Tax Alert
CBDT issues clarifications for smooth implementation of Income
Computation and Disclosure Standards
Executive summary
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This Tax Alert summarizes clarifications on Income Computation and Disclosure
Standards (ICDS) issued by the Central Board of Direct Taxes (CBDT) vide Circular No.
10/2017 dated 23 March 2017 (Circular).
ICDS are applicable from tax year 2016-17, in a revised form, pursuant to deferment
by one year by the CBDT in response to concerns raised by various stakeholders on
implementation issues. ICDS apply to taxpayers following the mercantile system of
accounting and for the computation of income chargeable under the “Business”[1] or
“Other Sources”[2] heads. They do not apply to taxpayers who are individuals or Hindu
Undivided Families (HUF), who are not liable for tax audit under the provisions of the
Indian Tax Laws (ITL).
The Circular provides clarifications on 25 issues by way of frequently asked questions
(FAQs). Some of the key clarifications include: (a.) Interplay between ICDS and Income
Tax Rules (Rules)/judicial precedents. (b.) Applicability of ICDS to taxpayers governed
by presumptive basis of taxation or sector-specific tax provisions. (c.) Parity of
treatment of mark-to-market (MTM)/expected gains with MTM/expected losses. (d.)
Taxation of retention money. (e.) Absence of test of reasonable certainty for
recognition of interest, and royalty. (f.) Transitional provisions for government grants
and provisions/contingent assets.
[1]
Profits and gains from business and profession
[2]
Income from other sources
Background
►
Section 145 of the ITL provides that the
taxable income of a taxpayer falling
under the “Business” or “Other Sources”
heads shall be computed in accordance
with either cash or mercantile system of
accounting, whichever is regularly
employed by the taxpayer. It further
provides that the Central Government
(CG) may notify, from time to time, ICDS
to be followed by any class of taxpayers
or in respect of any class of income.
►
Based on recommendations of the Expert
Committee (Committee) and public
consultation on the draft ICDS, the CG
had earlier notified[3] the old ICDS,
effective from tax year 2015-16, for
compliance by all taxpayers following the
mercantile system of accounting for
computing “Business” or “Other
Sources” income.
►
However, several concerns were raised by
various stakeholders on the
implementation of the old ICDS, which
resulted in hardships to taxpayers and
created uncertainty on the tax treatment
of several incomes and expenses,
including transitional impact of ICDS.
►
►
[3]
Vide a Press Release dated 26 November
2015, the CG announced that issues
raised by stakeholders for
clarification/guidance for proper
implementation have been referred to
the Committee. The Press Release also
invited comments from stakeholders on
implementation issues in the old ICDS.
Having regard to concerns raised by
stakeholders on challenges arising from
implementation of the old ICDS and
pending revision of the Tax Audit Report
to capture disclosures required in terms
of ICDS, the CBDT announced deferment
of the effective date of the old ICDS by
one year i.e., from tax year 2016-17
onwards[4].
Refer EY Tax Alert dated 2 April 2015, “Indian Government
►
The Committee, after duly consulting the
stakeholders in this regard,
recommended a two-fold approach for
the smooth implementation of ICDS viz.,
(a.) Amendment to the provisions of
ICDS. (b.) Issue of clarifications, in the
form of FAQs, for rest of the issues.
►
Accepting the recommendations, as a
first step, the CG rescinded the old ICDS
and notified revised ICDS to be effective
from tax year 2016-17 onwards[5] . The
revised ICDS continue to apply to all the
taxpayers following the mercantile
system of accounting and for
computation of “Business” or “Other
Sources” income. However, the revised
ICDS do not apply to taxpayers who are
individuals or HUFs, who are not liable
for tax audit under the ITL. Separately,
the CG also modified the Tax Audit
Report[6] format for including ICDS
related disclosure requirements and for
quantifying adjustment to profits or loss
for complying with ICDS.
►
As a second step, the CBDT has now
issued the Circular providing
clarifications on 25 issues, in the form of
FAQs, for the smooth implementation of
ICDS.
CBDT clarifications on ICDS
General:
·
[5]
Non-applicability of ICDS to books of
account: As clarified in the preamble to
each ICDS, ICDS are not meant for
maintaining books of account or
preparing financial statements. But,
accounting policies specified in ICDS-I
shall apply while computing “Business” or
“Other Sources” income, since specified
accounting policies are fundamental in
nature.
Refer EY Tax Alert dated 3 October 2016, “Government of India
notifies 10 Income Computation and Disclosure Standards
effective from tax year 2015-16 onwards”
amends Income Computation and Disclosure Standards and also
defers them by one year to tax year 2016-17”
[4]
[6]
Refer EY Tax Alert dated 6 July 2016, “Government of India
defers effective date of Income Computation and Disclosure
Standards by one year to tax year 2016-17”
Statement of particulars to be furnished in relation to tax audit
carried out under the provisions of the ITL
·
Relevance of past jurisprudence: After
due deliberation and examination of
jurisprudence, ICDS were introduced to
bring certainty on issues which were dealt
with in the past by jurisprudence in the
absence of authoritative guidance under
the ITL. Hence, for tax year 2016-17 and
onwards, provisions of ICDS shall be
applicable to such transactional issues
while computing “Business” or “Other
Sources” income, even if inconsistent with
judicial precedents.
·
·
Relevance of Generally Accepted
Accounting Principles (GAAP) adopted in
books: ICDS apply for computation of
“Business” or “Other Sources” income,
irrespective of accounting standards
adopted by companies i.e., IGAAP[7] or
Ind-AS[8] .
·
·
Non-applicability to Minimum Alternate
Tax (MAT): ICDS shall not apply for
computation of MAT in case of companies,
since MAT is computed on “book profits” [9]
Reasonable cause for change in
accounting policy is an existing concept:
The accounting policy can be changed by
the taxpayer if there is a “reasonable
cause”. “Reasonable cause” is an existing
concept and has evolved well over a
period of time, conferring desired
flexibility to the taxpayer in deserving
cases.
·
MTM gain is at par with MTM lossTaxable only upon realization: ICDS-I
provides that MTM loss or expected loss
cannot be recognized unless permitted by
any other ICDS. The same principle shall,
mutatis mutandis, apply to MTM gains or
expected profits.
·
MTM loss on derivative contracts
outside the scope of other ICDS not tax
deductible: ICDS-VI provides guidance on
taxability for derivative contracts, such as
forward contracts and other similar
contracts. ICDS-VIII covers derivatives
which qualify as “securities”’ under the
Securities Contract (Regulation) Act,
1956 (SCRA) for scheduled banks and
public financial institutions. ICDS-I shall
govern those derivatives which are not
covered within the scope of ICDS-VI/VIII.
·
·
Applicability to Alternate Minimum Tax
(AMT): ICDS shall apply for computation of
AMT in the case of non-corporate
taxpayers, since AMT is computed on total
income as per the normal provisions of the
ITL, subject to certain specified
adjustments.
[7]
[8]
[9]
ICDS-I on Accounting
Policies
Non-applicability to taxpayers governed
by specific provisions: General provisions
of ICDS do not apply to those taxpayers
which are governed by sector-specific
treatment as specified in the ITL or ICDS
(e.g., the ITL contain specific provisions
for the insurance business and ICDS-VIII
contains specific provisions for banks and
certain financial institutions).
Accounting Standards issued by the Institute of Chartered
Accountants of India (ICAI) and notified under the Companies Act
IFRS converged Indian Accounting Standards.
Profits as recorded in books of account, subject to specific
adjustments as prescribed under the ITL
Disclosure requirements: Net effect on
taxable income due to application of ICDS
is to be disclosed in the return of income.
Disclosures required under ICDS shall be
made in the Tax Audit Report. However,
there shall not be any separate disclosure
requirements for taxpayers which are not
liable to tax audit[10].
ICDS-III on Construction
Contracts / ICDS-IV on Revenue
Recognition
·
[10]
Specific Rules prevail over ICDS: In case
of any conflict between ICDS and the
Rules, the provisions of the Rules which
deal with specific circumstances (e.g.,
income from film production or
distribution) shall prevail over ICDS.
This will be relevant for taxpayers other than individuals and
HUFs to whom ICDS apply even if they are not liable to tax audit
commercial production, shall also be
capitalised.
·
ICDS and presumptive taxation: ICDS
apply even to taxpayers computing
income under the relevant presumptive
taxation scheme (where income is
presumptively determined at a specified
percentage of turnover or gross receipts)
for determining the amount of receipts or
turnover.
·
ICDS and gross taxation basis for nonresidents: ICDS also apply to taxpayers
computing income on gross basis, such as
interest, royalty and fees for technical
services in case of non-residents.
·
Taxability of retention money: Retention
money needs to be recognized as revenue
on billing if there is reasonable certainty
of its ultimate collection, even if such
receipt is contingent on satisfaction of
certain performance criteria.
·
·
Expenditure incurred after the plant has
begun commercial production shall be
treated as revenue expenditure.
ICDS-VI on Foreign Exchange
Transactions
·
ICDS-VII on Government Grants
·
Real estate developers/service
concessionaire agreements: In the
absence of separate ICDS notified for real
estate developers, service concessionaire
agreements and leases, these
transactions shall be governed by the
existing provisions of the ITL and ICDS, as
may be applicable.
Taxability of interest/royalty if
collection is uncertain: Interest on time
basis and royalty on contractual terms
need to be recognized as revenue in
accordance with the provisions of ICDS-IV,
even when the collection thereof is
uncertain. Any subsequent non-recovery
can be claimed as deduction in terms of
the provisions of the ITL. Furthermore,
specific provisions in the ITL, like those
applicable to banks and financial
institutions for interest income, shall
prevail over ICDS.
Capitalisation of expenditure incurred
between trial production and
commercial production: In addition to
expenditure incurred on commissioning of
projects, test runs and experimental
production, expenditure incurred after
conducting test runs and experimental
production, but before commencing
Taxability of government grants
received prior to 1 April 2016 Transitional provisions require that
government grants which meet
recognition criteria on or after 1 April
2016 need to be recognized as per the
provisions of ICDS-VII. Furthermore, ICDSVII provides that recognition shall not be
postponed beyond actual receipt.
Accordingly, government grants actually
received prior to 1 April 2016 are
deemed to be recognized on the date of
receipt of such grant. Hence, any grant
received prior to 1 April 2016 shall not be
governed by ICDS-VII, but shall be
governed by the existing provisions of the
ITL. This is irrespective of the fact that
the conditions attached to such grant are
satisfied on or after 1 April 2016.
ICDS-VIII on Securities
·
Taxability of broken period interest:
Interest income is taxable on time/accrual
basis as per ICDS-IV. If interest income on
security is taxed on accrual basis, but not
received till the date of sale of such
security (broken period interest), it shall
be allowed as deduction at the time of
computing income arising from sale of
such security.
·
Category-wise valuation of securities:
ICDS-VIII provides for category-wise
ICDS-V on Tangible Assets
·
Taxation of Foreign Currency
Translation Reserve (FCTR) balance:
Opening balance as on 1 April 2016 in
the FCTR relating to monetary items for
non-integral foreign operations needs to
be recognized in tax year 2016-17 to the
extent that it is not recognized as income
in past years.
valuation of securities (i.e.”bucket”
approach). Securities held as “stock-intrade” are initially recognized at cost and,
subsequently, such securities shall be
aggregated as per specified categories,
such as shares and debentures, and then
valued at cost or net realisable value
(NRV), whichever is the lower of each
category. Thus, aggregate cost of all the
securities under one category should be
compared with aggregate NRV of all the
securities under that category and lower
of the two aggregate values shall be
considered as carrying value. An
illustration has been provided in the FAQ
highlights that valuation as per ICDS may
be higher than valuation as per books on
individual scrip wise basis.
of general borrowing cost to be
capitalised shall be done on “‘asset-byasset” basis.
ICDS-X on Provisions,
Contingent Liabilities and
Contingent Assets
·
The transitional provision of ICDS-X
provides that all provisions or assets and
related income shall be recognized for tax
year 2016-17 in accordance with the
provision of ICDS-X, after taking into
account the amount already recognized
on or before 31 March 2016.
ICDS IX on Borrowing cost
·
·
·
Disallowed borrowing cost to be ignored
for capitalisation: Borrowing cost which
is disallowed under the specific provisions
of the ITL shall not be considered for the
purposes of capitalisation under ICDS-IX.
Borrowing cost covers bill discounting
and similar charges: Since borrowing cost
is defined inclusively, bill discounting
charges and other similar charges are
covered as borrowing cost.
Transitional impact of ICDS-X: ICDS-X
requires recognition of both “provisions”
and “contingent assets” on the basis of
“reasonable certainty”, as against criteria
of “probable” for provisions and “virtual
certainty” for contingent assets under
ICAI AS-29.
The intent of the transitional provision is
that there should neither be “double
taxation” of income due to application of
ICDS nor should there be escape of any
income due to application of ICDS from a
particular date.
·
The above principle is explained by way
of the following example in the Circular:
Allocation of borrowing costs: Allocation
Particulars
Provision required as per ICDS as on 31 March 2017 for items brought forward
from 31 March 2016 as per ICDS – X
Provisions as per ICDS for FY 2016-17
Total gross provision
Less: Provision already recognised in computation of taxable income in FY
2015-16 or earlier years
Net provision as per ICDS to be recognised in FY 2016-17 as per transition
provision
·
Scope exclusion for employee
benefits - Provision for employee
benefits, which are otherwise covered
Amount
million
30
in
50
80
20
60
by ICAI AS-15, are not dealt by ICDS X
and shall continue to be governed by
specific provisions of the ITL.
Comments
The Circular clears the air on many
significant issues, like parity of
treatment between MTM loss and MTM
gains, specific Rules prevailing over
ICDS, clarification on the treatment of
broken period interest on securities
for sellers, grandfathering of
government grants received prior to 1
April 2016 and carve-out from
capitalisation for non-tax deductible
borrowing costs. These clarifications
do address concerns of taxpayers and
shall be welcomed by them.
However, the CBDT’s views on certain
issues are likely to stir debate and
litigation, being contrary to taxpayers’
expectations and/or settled
jurisprudence. Some such issues are
taxation of retention money,
normative taxation of interest and
royalty income which are uncertain of
collection, capitalisation of expenses
incurred between trial production and
commercial production, upfront
taxation of FCTR balance in tax year
2016-17, retrospective catch-up
taxation of contingent assets etc.
Also, clarifications on certain issues,
like interplay between past
jurisprudence and ICDS, applicability
of general ICDS in the absence of
sector-specific ICDS on real estate
development, service concessionaire
agreements and leases etc., are likely
to create further controversy and
uncertainty.
It is fairly settled that circulars which
are beneficial to taxpayers are binding
on the Tax Authority, even if they
deviate from the strict legal position.
But, circulars which are adverse to
taxpayers, being at variance with the
correct legal position, are not binding
on taxpayers or the Courts.
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