Two accounting standards relating to disclosure of accounting policies are currently notified under the Income Tax Act, 1961. Recently, the Ministry of Finance issued draft Tax Accounting Standards (TAS), whose objective is to compute precisely ‘Profits and gains of business or profession’ or ‘Income from other sources’, reduce litigation, and bring more certainty.

Changes have been proposed for 14 out of 29 accounting standards notified under the Companies Act 1956 and the Institute of Chartered Accountants of India for corporate and non-corporate assesses, respectively, to harmonise them with provisions under the Income Tax Act:

Applicability of TAS for computation of taxable income and its certification by the tax auditor.

Separate books of account need not be maintained.

Provisionsof the Income Tax Act would prevail when in conflict with TAS.

However, the devil is in the details of some of the proposed changes such as:

The concept of materiality, which is fundamental to the preparation of financial statements and reporting by auditors, has not been explicitly laid down.

Non-recognition of marked-to-market losses as a factor in the selection of accounting policies vis-à-vis the concept of prudence.

Valuation of the inventories of a service provider at cost vis-à-vis an established principle of lower cost and net realisable value.

Issues in revenuerecognition: clarity is required where the transfer of property during a sale does not coincide with the transfer of significant risks and rewards of ownership (such as sales made on extended credit where the seller retains the title to the goods sold to safeguard against non-payment); postponement of revenue recognition on sale of goods, due to uncertainty in collection, is restricted to price escalation and export incentives, and not other factors such as contingent pricing; the percentage completion method prescribed for services rendered may not be appropriate for transport or professional services.

Foreign exchange differences related to non-integral foreign operations have been recognised for income computation without considering the distinction from integral operations.

Goodwill, a contentious issue, is not dealt with.

Recognition of contingent assets on the basis of ‘reasonable certainty’, as compared to the established concepts of ‘virtual certainty’ and prudence.

Capitalisation of borrowing costs used for acquiring a qualifying asset is to be computed using a formula that requires more clarity. Definition of a qualifying asset includes inventories that require 12 months or more to bring them to a saleable condition.

While TAS aims to achieve objectivity in the computation of income and reduce subjectivity and litigation, it requires a framework similar to the ICAI’s for the preparation and presentation of financial statements. This, together with guidance from the ICAI for prescribing an auditor’s certificate/ report on the computation of taxable income and suggestions from the public, could help bring greater clarity.

Arvind Nath is Associate Director, Price Waterhouse

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