The Hindu Business Line : May ambiguity cease in cess accounting

LISTED companies have to mandatorily publish quarterly accounts in accordance with the clause 41 of the Listing Agreement. Newspapers are flooded with quarterly accounts and investors and users of financial statements use this information as a trendsetter for the full year results that will unfold as the year comes to an end.

While there is no doubt that the information provided in the quarterly accounts along with Notes on Accounts provide useful information to the world at large, there are niggling problems in compiling and preparing of the statements. Support by way of accounting guidance is available through AS-25 (Interim Financial Reporting), which prescribes certain procedures and rules for preparing quarterly/half-yearly accounts.

Changes in tax rates

Even at the stage of implementing AS-25 in the initial stages, sufficient debate was generated on how to provide for tax expense, particularly deferred tax, in respect of quarterly accounts. AS-25 basically provides for two methods in providing for tax expense — integral and discrete.

These two concepts have been borrowed from IAS 34. While providing for deferred tax in the interim accounts, paras 20 and 21 of AS-22 (Accounting for Taxes on Income), are relevant. From a reading of these two paragraphs, the immediate question that needs to be addressed is what will be the effect of the recently announced 2 per cent cess on July 8, 2004? The attendant question is: Should cess be taken into account for preparing accounts for the quarter ended June 30, particularly when the announcement of cess was made in the Lok Sabha only on July 8?

Corporates have by this time more or less published their quarterly accounts, the last date being July 31, 2004. Still this question is significant since a similar situation can emerge in the future as well. The Income-Tax Act, 1961, had already envisaged the situation of change of tax rates and implementation of the same in Section 294 of the Act.This provision though relevant from the assessee's view point to determine his tax liability may not be directly relevant to interpret this issue in the context of AS-25 (Interim Financial Reporting) read with AS-22 (Accounting for Taxes on Income).

ICAI clarification

In all fairness one must state that the premier accounting body ICAI swung into action quickly and clarified the matter stating that corporates need not take into account cess for determining tax expense in accordance with AS-22 for the quarter ended June 30, 2004.

The clarification also states that even for readjusting the deferred tax asset or liability for the existing position as of March 31, 2004 or June 30, 2004, as the case may be, the cess can be ignored.

Reasoning

The reasoning adduced by the ICAI draws support from the language employed in para 21 of AS-22 which uses the expression "substantively enacted by the balance-sheet date." The crux of the issue here is since the Bill itself was introduced after the quarter ending June 30, 2004, one cannot conclude that the provision of cess has been substantively enacted for the quarter ended June 30, 2004.

The concept of such cess itself arose only after the period ending is over. Therefore, the clarification has interpreted this matter to state that for the period ending June 30, 2004, there is no proposal of cess on that date and the question of applying the same to determine the tax expense for the relevant quarter does not arise.

Accordingly, there is no question of even applying contingencies and events occurring after the balance-sheet date viz., AS-4 to this situation because this is not an issue of providing further evidence of conditions that existed on the reporting date. Though the levy of 2 per cent of cess has to be passed by Parliament before it becomes law, most of the corporates have taken the stand that 2 per cent cess will have to be taken into account for monthly tax deduction at source (TDS) post-July 8, 2004. This is a conservative view.

There is also some doubt as to, once the 2 per cent cess becomes part of the Act, may be in August 2004, should this be taken into account for April/May/June TDS payments? While this is a legal issue which can be debated, the logic and reasoning adduced in the ICAI clarification can hold good and one can take the stand that the cess itself has come into the picture on July 8, 2004, and consequently all payments after July 8, 2004, alone will have to take into account TDS for cess purposes.

(The Chennai-based chartered accountant.)