Whether Is it necessary to have Income Computation and Disclosure Standards (Icds)?
Section 145(2) of the Income-tax Act, 1961 (the Act) authorises the Central Government to notify Income Computation and Disclosure Standards (ICDS) for the purposes of computation of income.
The CBDT has notified 10 amended ICDS vide notification dated September 29, 2016 applicable to assessment year 2017-18 and subsequent assessment years, to be followed by all assessees (other than an individual or an HUF who is not required to get his accounts of the previous year audited in accordance with the provisions of section 44AB of the Act) following the mercantile system of accounting, for the purposes of computation of income chargeable to income-tax under the head “Profits and gains of business or profession” or “Income from other sources.”
The basic principle of income-tax is to tax the real income and commercial profit of the assessee subject to certain specific allowance / disallowances. The accounts of the assessee are maintained on the basis of the Accounting Standards prescribed under the Companies Act and / or issued by The Institute of Chartered Accountants of India (ICAI). Therefore, the profit disclosed in the books of account maintained by the assessee adopting such Accounting Standards reflects the true commercial profit earned by the assessee. Generally, that should be accepted as income for the purpose of the Act, subject to certain necessary allowances and disallowances as per the Act.
ICDS is not adding any value and in fact, is bound to create uncertainty and deference in the conduct of business in India. It militates against the professed policy of the Government to simplify the taxation system. While amendments in the law, guidelines and standards are made with the intent to reducing litigation, it is feared that these notified ICDS will not achieve the intended objectives. It is apparent that with a huge divergence in the accounting prescribed under Ind AS regime, differences with Accounting Standards, overwriting of the law established through judicial precedents and coinage of new terminologies, there will be a substantial increase in unintended tax litigation. Again there will not be any significant
revenue benefit in the long run by enforcing ICDS.
It is totally unjust, unfair, unrealistic and very onerous to impose another set of standards i.e., ICDS on the assessees for the purpose of computation of total income. These ICDS in fact change the above basic principles and affect the computation of total income of assessees. Although it is stated that such ICDS are not meant for maintenance of books of account, if one peruses even the amended ICDS notified by the CBDT, it becomes clear that effectively such ICDS will have a direct bearing on the maintenance of books of account. As such, with these ICDS, effectively the assessee would be required to keep and maintain dual set of books of account to comply with the requirement of ICDS and / or will have to spend considerable amount of time, energy and manhours in preparing and reconciling income as per ICDS and the one computed as per books of account maintained as per the applicable Accounting Standards. This becomes clearer with the amendment made in Form 3CD (part of Tax Audit Report) in this respect.
Moreover, even though the preamble to ICDS states that the ICDS are not for the purpose of maintenance of books of account, the deviations from accepted accounting principles (such as different formula for capitalising general borrowing costs, non recognition of expected or marked-to-market (MTM) loss) would result in maintenance of separate books of account for tax purposes. Such maintenance of parallel set of books of account would be burdensome, require changes to existing IT systems and result in high cost of compliance.
Accounting Standards are applicable to all corporate and non-corporate entities. Whereas ICDS is applicable to all taxpayers following mercantile method of accounting (i.e., to all taxpayers other than those following the cash system of accounting).
Further, the amended Form 3CD requires a tax auditor to certify the adjustments to be made to the profit and loss in accordance with the provisions of ICDS. Before certification, a tax auditor would invariably require such parallel profit and loss account and balance sheet to be prepared, to ensure that all adjustments required on account of ICDS have been considered. This will result in substantial work for most businesses and may even result in the requirements of parallel MIS, one for the purposes of regular accounts, and the other for the purposes of ICDS.
At this juncture, it is to be noted that only 1% of the total population pays the Income tax as per the official Government published data, of which persons filing return of income on cash basis as well as persons filing return of income under the head “salaries” plus persons who are not liable to tax audit in the preceding previous year would go out of 1% of the said population. So, compliance with ICDS is an additional requirement, for few persons, will increase the compliance burden and cost in the hands of the taxpayers and would thus defeat the purpose of ICDS in terms of simplification of processes. Therefore, it is to be pondered, whether there would be any increase in revenue to the Government because, generally, in ICDS, there is pre-ponement of income.
In fact, Income tax Simplification Committee, set up by Ministry of Finance and chaired by Justice R. V. Easwar (Retd.) in its report containing first batch of recommendations has rightly made the following observations w.r.t. ICDS.
“Taxpayers are already grappling with regulatory changes of the Companies Act, 2013 Ind-AS and the proposed GST. Industry should be allowed more time to deal with another change of this nature. The Committee understands that the taxpayers feel that many of the provisions of the ICDS are capable of generating, a legal debate about which at present there is no clarity.
Further, multiple accounting methods, one for the books of account and other for tax purposes, creates confusion, interpretation issues, multiplicity of records and additional compliance burden which may outweigh the gains to be obtained by the application of ICDS. It has also been felt by the Committee that ICDS deals only with the method of accounting and at best it brings timing differences on recognition of expenditure or income as compared to the books of account. The Committee therefore feels that a fuller study of the implication of the ICDS is necessary before it is implemented”.
Recently, the Indian Accounting Standards (“Ind AS”) were notified by the Ministry of Corporate Affairs wherein companies may voluntarily adopt Ind AS for financial statements for accounting periods beginning on or after April 1, 2015 with the comparatives for the period ending March 31, 2015 or thereafter. Once a company opts to follow Ind AS, it will be required to follow the same for all the subsequent financial statements.
Further, there could be earlier judicial rulings which are based on the relevant provisions of the Act and as well as accounting standards, where the courts interpreted the law on the basis of such accounting standards. These judicial rulings would now have to be reconsidered in light of the requirements of ICDS, as the method of accounting is now subject to ICDS.
Thus, it would defeat the very purpose of ICDS of bringing certainty in tax and reduction of litigation.
Currently, profits reflected as per the normal accounting standards is accepted as a basis for determining taxable business income subject to specific provisions contained in Chapter IV-D of the Act. However ICDS does not recognise the universally-accepted principles of ‘prudence’ even though the same has been accepted by the courts for tax purposes. Non-recognition of the principle of prudence will lead to taxable profits being overstated. Also, such a deviation adopted by ICDS is bound to lead to litigation.
It is strongly felt that the revenue department has introduced section 145(2) and the ICDS, to reverse the impact of some of the decisions of the Supreme Court and various High Courts. In the revenue’s zeal to take some corrective action, a huge unproductive compliance burden without any substantial benefit to exchequer, has been imposed on the business community, which is certainly not helping in improving the
image of India as a favourable investment destination.
We, therefore, suggest that in the interest of making India a highly attractive place for doing business and for the furtherance of stated policies of the Government of ‘Make in India’ and ‘Ease of doing Business in India’, section 145(2) and the notified ICDS should be abolished.
H. N. Motiwalla