Introduction

The year 2015 has ushered in a new era for compliance service providers with the introduction of two sets of new standards issued by the Ministry of Corporate Affairs (MCA) & the Central Board of Direct Taxes (CBDT) respectively. The MCA notified the Companies (Indian Accounting Standards) Rules, 2015 in February 2015 laying down the roadmap for application of IFRS converged Indian Accounting standards (Ind – AS) along with the Ind – AS standards for application by companies other than Banking Companies, Insurance Companies and Non – Banking Finance Companies (NBFCs). The CBDT vide Notification no. 32/2015 dated 31 – 03 – 2015 has notified 10 Income Computation and Disclosure Standards (ICDS) effective from 01 – 04 – 2015, applicable from Assessment Year 2016 – 17 onwards to be followed by all the assessees, following the mercantile system of accounting. The Ind – AS roadmap provides for a phase wise implementation with Ind – AS up for voluntary adoption for FY 2015 – 16 and becoming mandatory for certain class of companies from FY 2016 – 17 onwards.

The International Accounting Standards Board (IASB) taking into account the considerable practical difficulties surrounding first – time application of IFRS, published IFRS – 1 First – time Adoption of International Financial Reporting Standards in order to assist preparers to overcome the practical difficulties in applying IFRS for the first time. Ind – AS 101 (First-time adoption of Indian Accounting Standards) is the standard corresponding to the revised IFRS – 1. Ind – AS 101 provides numerous mandatory exceptions and optional exemptions. Though Ind – AS 101 goes some way to reduce the burden of historical accounting information, it does not turn the transition process into a hassle free job. Even under Ind AS – 101, the transition will remain a complex and time consuming process for many entities, placing demand on areas such as staff training, data collection, and new or modified information system requirement. Another challenge relates to the exemptions available in preparing the transition date balance sheet. The biggest challenge, however, will be the alignment with various legislations including direct and indirect tax legislations or RBI guidelines on compliance with accounting standards. The standard includes both optional and mandatory exceptions and companies are required to make judgements and decisions about the options to apply in their first set of Ind – AS financial statements. In this article we shall be discussing the issues arising from convergence to Ind – AS and its impact from direct tax perspective.

Ind – AS and ICDS

Till recently, for the purpose of computation of taxes, the profits as per books was the starting point to which various adjustments were made for arriving at the taxable income. With the introduction of Ind – AS and its emphasis on fair value accounting, the book profits as per Ind – AS and the existing GAAP will be substantially different, which would have resulted in higher tax liability of Ind – AS adopters over Ind – AS non-adopters under the regular provisions of Income-tax Act. However, with the timely introduction of ICDS by the CBDT, this challenge has been overcome as taxable income now will be computed as per ICDS ensuring uniformity in taxation irrespective of the accounting framework followed by an entity.  

In case of ICDS, they are applicable for all categories of assessees for computation of income under Chapter IV – D and IV – F of the Income – tax Act, 1961, from AY 2016 – 17. Therefore, for the purpose of advance tax computation for the Financial Year 2015 – 16, those Company assessees who have voluntarily adopted Ind – AS will have to compute profits as per Ind – AS for the purpose of book profits and compute income as per ICDS for the purpose of Income –tax Act, 1961 to determine the taxable income under the provisions of the Act.

Ind – AS and Minimum Alternate Tax (MAT)

Coming to MAT, Sec. 115JB of the Income – tax Act, 1961 provides that the profit and loss account shall be prepared in accordance with Schedule – III of the Companies Act, 2013 (earlier Schedule VI of the Companies Act, 1956) and Sec. 129 of the Companies Act, 2013. Sec. 129 of the Companies Act, 2013 prescribes that the accounting standards notified under section 133 of the Companies Act have to be complied with while preparing the financial statements. Those Companies to which Ind – AS are applicable shall prepare the profit and loss account as per Ind – AS’ and the remaining Companies shall continue to prepare their profit and loss account as per Companies (Accounting Standard) Rules, 2006.

With the introduction of ICDS, computation of taxable income under regular provisions of the Act has attained certainty and how the possible influence of Ind – AS on computation of taxable income is negated. However for the purpose of Sec. 115JB of the Income – tax Act, 1961, ICDS will not be applicable for computation of book profits as book profits will be computed under the regular accounting framework followed by the Companies. This could result in a situation where book profits as per Ind – AS would be higher over companies which are non Ind – AS adopters resulting in higher current tax outflows. The reason being that in comparison to the existing Indian GAAP, in case of Ind – AS there is an increased emphasis on fair value accounting principles which may be routed through profit and loss account (Fair Value through P&L – FVTPL) or as an item of other comprehensive incomes (Fair Value through Other Comprehensive Income – FVTOCI). Also the adjustments to book profits prescribed in Explanation 1 to Sec. 115JB for the ultimate levy of MAT are based on the existing Indian GAAP. Thus adopting Ind – AS for preparation of financial statements might result in higher profits due to the emphasis on fair value concept and changes in other Ind – AS’s vis – a – vis existing Indian GAAP thereby resulting in potential higher current tax outflows due to levy of MAT.

An instance where profit would be higher under Ind – AS over existing Indian GAAP is in case of Ind – AS 19 Employee Benefits corresponding to the existing Indian GAAP AS – 15 Employee Benefits. In case of AS – 15 all actuarial gains and losses should be recognised immediately in the statement of profit and loss which could result in a lower book profit. Whereas, under Ind – AS 19, actuarial gains and losses representing changes in the present value of the defined benefit obligation resulting from experience adjustments and effects of changes in actuarial assumptions are recognised in equity through other comprehensive income and not reclassified to profit or loss in a subsequent period.

Ind – AS and Income – tax Act, 1961

Going forward with the adoption of Ind – AS the revenue numbers reported by the entity for Income – tax purposes and revenue as per books could be quite distinct. Revenue numbers for the purpose of Income – tax would be recognised as per ICDS – 3 (Construction Contracts) and ICDS – 4 (Revenue Recognition) which are similar to AS – 7 and AS – 9 of the existing Indian GAAP subject to a few differences between the ICDS and the AS under the existing Indian GAAP. Under Ind – AS revenue recognition is regulated as per Ind – AS 115 Revenue from Contracts with Customers and it subsumes both AS – 7 and AS – 9. Ind – AS 115 essentially entails five broad steps to account for revenue. The core principle of Ind – AS 115 being that an entity will recognize revenue when it transfers control over goods or services to customers with an amount that reflects the consideration to which the entity expects to be entitled in exchange for underlying performance obligations arising from the transaction. This will require entities to use more judgement and make more estimates than today’s revenue standards.

There will be other instances of difference which will arise between Ind – AS and current accounting norms as Ind – AS seeks to record the transaction by its substance over its legal form. For example Ind – AS 32 (Financial Instruments – Presentation) requires the issuer of a financial instrument to classify the instrument as a liability or equity on initial recognition, in accordance with substance and the definitions of the terms of issue. The application of this principle requires certain instruments that have the form of equity to be classified as liability. Therefore, items like mandatorily redeemable preference shares will now be treated as a liability and fixed dividend payable on them will be treated as an interest expense. However, for Income – tax purposes it will still remain as dividend payments due to the operation of Sec. 2 (22) of the Income – tax Act, 1961.

Ind – AS 12 – Income taxes prescribes accounting for deferred tax liability or asset and follows the balance sheet approach over the income statement approach under the existing Indian GAAP. Under Ind – AS 12 it is assumed that assets will be realised and liabilities will be settled at their carrying amounts. If the carrying amounts of assets and liabilities differ from their corresponding tax bases, future tax effects will result from reversals of such book and tax basis differences. Accordingly, deferred taxes will be recorded on the resultant temporary difference (as opposed to timing differences under the existing Indian GAAP). This approach under Ind – AS is broader and likely to result in deferred taxes on more items and also additional deferred taxes on some items.