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The workload for finance departments in companies has increased and become more complex with the development of new tax accounting standards. There was a breather when the applicability of Indian accounting standards was deferred, but that was short-lived as another regulatory hurricane, the Tax Accounting Standards or TAS, looms.
In December 2010, the Central Government constituted a committee to suggest accounting standards for tax compliance. In its final recommendations, the committee has called for the notification of 18 TAS and provided drafts of 14 others. The Government has invited comments and suggestions, which closes today.
General Principles of TAS
Key principles recommended by the committee include
TAS applies only to computation of income under the heads ‘profits and gains’ of business or profession, and ‘income from other sources’.
Provisions of tax laws will prevail when in conflict with TAS.
TAS to be used in computation of taxable income. Taxpayer need not maintain separate account books.
Minimum alternate tax or MAT will still be governed by books of account prepared according to the Institute of Chartered Accountants of India’s accounting standards.
TAS should be applicable to all taxpayers to bring in certainty.
Measuring TAS-readiness
Memorandum books of accounts: TAS does not mandate a separate set of books; it only requires adjustment in return of income. However, companies will need systems and processes to track the adjustments, including adequate documentation/ evidences to back the adjustments for tax assessments or audits. Practically, this calls for memorandum records.
Change in tax computation methodology: TAS is likely to impact computation of taxable income, as it changes the recognition and measurement criteria of some income and expenses. For example, revenue recognition criteria under TAS are similar to those under AS9, except for disallowing non-recognition of revenue if significant uncertainty exists on measurability and collectability of revenue. Uncollectible debtors may be claimed as bad debt expense deduction. This may create problems such as interest on doubtful/ sticky loans, revenue based on success fee model, and so on. Even for revenue of a doubtful nature that might be recognised with a corresponding provision, there could be a MAT exposure as provisioning for doubtful debts is not allowed.
Changes in system and processes: The introduction of TAS may call for modifying or developing new systems and processes. For instance, companies have to ensure their fixed asset register provides the requisite information. TAS permits non-recognition of margins up to 25 per cent completion in the case of construction contracts, so IT systems and processes have to be configured to generate TAS adjustments to defer margin on all construction contracts up to 25 per cent completion. Also, systems should not consider deferral on account of uncertainty on outcome or project, or ultimate collection.
Diagnostic assessment and training: Companies should consider a detailed diagnostic to assess the impact of TAS on tax liability, accounting work-stream, and systems and processes. As part of this exercise, they should train their accounting and tax professionals on TAS requirements, and on the differences between the two accounting frameworks.
Once notified, TAS will be the basis for computing taxable income. Companies should start early and take appropriate steps to ensure a smooth transition.
Jigar Parikh is senior professional in a member firm of Ernst & Young Global
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