Taxing matters

For the past five years, the Central Board of Direct Taxes (CBDT) has been attempting to pronounce accounting standards for computation of income. The Tax Accounting Standards were rechristened Income Computation and Disclosure Standards (ICDS) in March 2015 and their implementation was deferred by a year. Revised standards were issued in 2016 and, recently, the CBDT has answered 25 questions on ICDS. Even so, the standards face many glitches.

The Income-Tax Act is a detailed piece of legislation that elaborates on computation of income under various heads of income. Appellate tribunals and courts revel in dissecting these Sections leaving taxpayers with a bewildering array of provisions and interpretations. For instance, whether non-compete fee is revenue or capital in nature has been debated in almost every High Court and no two courts have given a uniform judgement. It was only a matter of time before the Income Tax Act was amended to tax non-compete fees as income. With such weaponry, there appears to be no necessity for the CBDT to look up ICDS provisions for specific guidance.

The Standards do not resolve all the thorny issues on taxation; this can be attributed to a couple of reasons. The first is they are incomplete; only 10 ICDS Standards have been issued while we have 29 Accounting Standards and 39 Indian Accounting Standards. The second reason is that the Standards that have been announced are too short and are over even before one has read them (leave alone understanding them). It appears that they have been promulgated only to tick off one box in the tasks before the CBDT.

Some of the responses in the latest set of clarifications are, to say the least, bizarre. One of the questions asked is ‘what constitutes reasonable cause (since an entity can change accounting policies only if there is a reasonable cause) as per ICDS’.

In response, the CBDT comes out with a stunner: Under the Act, “ reasonable cause” is an existing concept and has evolved well over a period of time conferring desired flexibility to the taxpayer in deserving cases!

While the meaning of this sentence may take some time to be understood, a question that pops up is — If ICDS is going to take guidance from the Income Tax Act for even basic concepts such as reasonable cause, why do we need ICDS?

If Income Computation is driven by the Income Tax Act, disclosures are driven by the Tax Audit Report that is mandated for a certain class of taxpayers. The Tax Audit Report contains a list of various disclosures and details, which enable the tax officers to adjudicate on various matters. If the CBDT was keen on mandating more disclosures, all they really needed to do was to amend the Tax Audit Report — something that has been done in the past.

Even if taxpayers do adapt to ICDS, whether the tax department themselves are prepared to implement ICDS is a question the answer to which appears to be negative. Almost everybody who is somebody in the tax department is busy with the impact of demonetisation and Income Disclosure Schemes.

If the tax department indulge themselves in assessments without knowing the provisions, there is bound to be mayhem. The CBDT should not get into unfamiliar terrain such as accounting standards. It should scrap ICDS with immediate effect and focus on core strengths — administering the Income Tax Act.

The writer is a chartered accountant

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