Taxation Issues with Indian Accounting Standards

What is Indian Accounting Standards?

Indian Accounting Standards to Convergence with IFRSIndian Accounting Standards are sets of Accounting Standards which are notified by the “Ministry of Corporate Affairs”.  The primary objective of notifying Indian Accounting Standards is to converge with the International Financial Reporting Standards (IFRS). These Accounting Standards are issued by the “Accounting Standards Board” (ASB) of the Institute of Chartered Accountants of India (ICAI).

Now India has two sets of Accounting Standards-

  • Accounting Standards under Companies Rules, 2006
  • IFRS converged Indian Accounting Standards.

The Ministry of Corporate Affairs has notified 35 Indian Accounting Standards, but no date has been notified for the implementation of the Indian Accounting Standards.

The “Central Board of Direct Taxes” has been given the task of resolving the conflicts arising between the Income Tax Act and the Indian Accounting Standards.

Tax Issues Arising Due To Indian Accounting Standards

  • As per Indian Accounting Standard 16 “Property, Plant and Equipment”, the initial estimate of dismantling obligations is included in the cost of asset, so the depreciation will be calculated in this cost also. But will this cost be included in ‘actual cost’ for calculation depreciation as per IT act is not clear because in Supreme Court decision in “Challapalli Sugars Ltd. V CIT” [1975] 98 ITR 167, it was held hat normal accountancy rules are to be referred for the purpose of calculation of cost of asset. Even in the DTC the actual cost has been defined as the cost of the asset to the taxpayer plus interest cost which is capitalized less the duties and the subsidies which are received by the assessee.
  • As per Indian Accounting Standard 8 “Accounting policies, changes in Accounting estimates and Errors” If any material deviation is found in the current year, then the relevant figures in the earliest prior period will require restatement that is presented for comparison. It must be done by adjustment of opening retained earnings or assets and liabilities whatever is applicable. This issue can be dealt by the IT Department in two ways
  1. Reassessment of the prior period-In this case it will be very difficult for the department to keep track of every change in the corporate financials.
  2. Deal with the issue in the current assessment year.
  • As per Indian Accounting Standard 39 “Financial Statements: Recognition and measurement” the loans and receivables are to be accounted using effective rate of interest on the basis of amortised cost. If a employer gives interest free loan to employee then following issue will arise-
  1. The interest charge will be disallowed to the employer and the effective interest method will be applied even though it is not actual.
  2. The interest free loan is a perquisite to the employee and will be chargeable to tax.

This is the case of Double Taxation.

  • As per Indian Accounting Standard 21 “The Effects of change in Foreign Exchange Rate” a company can keep its accounts in any foreign currency as its functional currency, but in the CESC Ltd V CIT (1998) 233 ITR 50 it was held by the Supreme Court that a company can keep its accounts in foreign currency but the depreciation has to be calculated in Indian currency at the time of its acquisition. If the Income Tax officer chooses to this mandatory it would not be feasible for the company to operate a different set of calculations and accounts for the purpose of calculating depreciation from the standpoint of cost benefit analysis.
  • When a Parent company transfers its assets to 100% subsidiary company in India, then it is not transfer as per section 47 of Income Tax for the purpose of calculating Capital gains. As per taxman, the legal owner of the asset will be the parent company and it will still be taxed in the hands of the parent company. If the transfer qualifies as transfer as per Indian Accounting Standard 39, the subsidiary can recognize this as an asset and can account the income from the asset as tax free income. This could be very favorable for upbringing subsidiaries.
  • As per Indian Accounting Standard, the asset has to be recorded in the books at Fair value after segregating the imputed interest component. Assuming that the Accessing Officer accepts the measurement by the assesse, whether he will allow the deduction for interest is still not clear
  • As per Indian Accounting Standard 37 “Provisions, contingent liabilities and contingent assets”, it is required to make provisions for constructive obligations for e.g. Warranty. These provisions are unascertained liabilities as per Income tax and it will be disallowed by the Accessing Officer until it is actually cleared by the assessee.

These are only some issues which will arise; a lot of issues will be raised from deep unearthing from the Indian Accounting Standards. CBDT has now a cumbersome task of bridging the gap between the Income Tax Act and the Indian Accounting Standard.

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