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India moves towards new 'tax accounting standards' on way to IFRS

29 Oct 2012

The Central Board of Direct Taxes (CBDT), a body within the Indian Ministry of Finance, has publicly called for comments on a report submitted by its Accounting Standards Committee (Committee) on which standards should be used for tax purposes in India in light of India's possible transition to IFRS. The report recommends the creation of 'Tax Accounting Standards' for computing taxable income, a development which may partially address some of the concerns around adopting IFRS in the Indian context.

The Committee which produced the report was constituted in December 2010 to provide advice on the appropriate accounting standards for tax purposes in India, and had issued an interim report in August 2011.  Previously, an earlier Committee report issued in 2003 in light of existing Indian accounting standards recommended  the use of those standards on an unmodified basis, along with consequential legislative amendments to the Act with an aim of preventing revenue leakage.

In February 2011, the Indian Ministry of Corporate Affairs (MCA) issued 35 Indian Accounting Standards (Ind-AS) which were converged with IFRS, and announced their 'phased implementation' once certain Indian tax and other issues were resolved.  To date, an implementation date of the new Ind-AS standards has not been announced.

The Committee report is therefore an important step in addressing the concerns around the use of IFRS in India, particularly where Ind-AS might otherwise also be used for tax purposes, and may be seen a bringing India a step closer to adopting IFRS (in the form of Ind-AS, which contains some modifications of IFRS principles).

The Committee report analyses various issues which may arise in notifying Accounting Standards under section 145 (1) of the Indian Income-tax Act, 1961.  These issues include:

  • Whether taxpayers would be required to maintain two sets of books of account i.e. one in accordance with the Accounting Standards issued by the Institute of Chartered Accountants in India (ICAI), and another in accordance with the Accounting Standards notified under the Act.  The report recommends standards notified under the Act should be made applicable only to the computation of taxable income (rather than a separate set of books) and be termed as “Tax Accounting Standards” (TAS)
  • Whether the TAS should be made applicable to all taxpayers or to a class of taxpayers having turnover / income above a certain threshold limit.  The Committee recommends that the TAS should be made applicable to all taxpayers
  • Resolutions of conflicts between the express provisions of the Act and the TAS.  The Committee recommends provisions of the Act should prevail over the TAS
  • Other matters.  The Committee recommends that any required transitional provisions should also be notified along with the TAS and that appropriate modification in the return of income be made.

The Committee's report also includes drafts of the Tax Accounting Standards themselves, which are based on accounting standards with modifications considered appropriate for tax accounting purposes.  For instance, the proposed TAS would measure gains and losses on certain foreign currency transactions on a realised basis, and prohibit the revaluation of property, plant and equipment for tax purposes.

The original mandate of the Committee included a requirement to suggest method of determining  the tax base (book profit) for the purpose of India's Minimum Alternative Tax (MAT) in case of companies migrating to IFRS in the initial year of adoption and thereafter.  The Committee report concludes that given the fluid and uncertain situation regarding the transition to Ind-AS, the Committee decided to primarily focus on the formulation of TAS harmonised with the provisions of the Act, and recommends that the status of the transition to Ind-AS should be carefully monitored.

The CDBT is requesting comments and suggestions on the final report be submitted by 26 November, 2012.

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