Background

The Ministry of Finance (MoF), on 31 March 2015, issued 10 Income Computation and Disclosure Standards (ICDS), operationalising a new framework for the computation of taxable income. All assesses were required to adopt these standards for the purposes of computation of taxable income under the heads ‘Profits and Gains of Business or Profession’ or ‘Income from Other Sources’.

The Central Board of Direct Taxes (CBDT) notified these standards under Section 145(2) of the Income-tax Act, 1961 (the IT Act) vide ‘Notification No. 33/2015 dated 31 March 2015. These standards were applicable for the previous year commencing from 1 April 2015, i.e. Assessment Year (AY) 2016-17 onwards.

New development

Subsequent to notification of ICDS, a number of representations were made by many stakeholders which were examined by an Expert Committee (the Committee) comprising departmental officers and professionals. The Committee has recommended amendments to the notified ICDS as well as issuance of clarifications in respect of certain points raised by the stakeholders.

The MoF, on 6 July 2016, announced that the revision of ICDS as recommended by the Committee, is under consideration. Revision to the Tax Audit Report is also under process for ensuring compliance with the provisions of ICDS and capturing the disclosures mandated by them. Further, some of the taxpayers might have filed their return of income and obtained Tax Audit Report without incorporating the compliance with the ICDS and related disclosures in the absence of the revised Tax Audit Report.

In light of the above, MoF has announced that ICDS shall be applicable from 1 April 2016 i.e. Previous Year 2016-17 (AY 2017-18), instead of 1 April 2015. A notification to this effect is expected to be issued shortly.

Our comments

The adoption of ICDS brings with it a significant change and is expected to alter the way companies compute their taxable income, as several concepts from the existing generally accepted accounting principles in India (Indian GAAP)/Indian Accounting Standards (Ind AS) have been modified. This has raised many implementation challenges for companies in India and the deferment of ICDS implementation can give India Inc. additional time to fully understand and evaluate the potential impact on their tax liability for a smooth and effective transition to ICDS.

It is also expected that with the additional time, companies would be able to better align their ICDS implementation with the Ind AS implementation process. It will also provide regulators time to issue all clarifications and make necessary amendments in ICDS or other legislations, for smooth implementation of ICDS.

We also expect regulators to provide full clarity regarding provisions of Minimum Alternate Tax (MAT) (for companies moving to Ind AS), revision to new tax audit forms and feedback on clarifications sought by various stakeholders.

However, the deferment has also given rise to some uncertainty as highlighted below:

• Companies transitioning to Ind AS: The ICDS framework was intended to provide a stable platform for the computation of taxable income considering that certain companies are transitioning to Ind AS. While many companies would start reporting under Ind AS from the Financial Year (FY) 2016-17, there are a few that have early adopted Ind AS for FY 2015-16. The deferment is therefore expected to give rise to significant uncertainty for such companies as to the basis for computation of taxable income. Accordingly, CBDT may need to provide clarity on the method to be adopted by such companies for computation of their taxable income.
• Computation of advance tax: Companies that have paid advance tax on the basis of the ICDS for FY 2015-16 have to now recalculate and determine their tax liability in the absence of ICDS. This may lead to a situation where additional tax could be payable or a tax refund may become due. Companies need to assess the impact on their cash flows due to taxes and further clarity is required on any interest or penalties that may arise as a result of additional tax being payable. A similar issue may arise for the advance taxes due for the first quarter of FY 2016-17 as well.
• Provision for tax: From a financial reporting perspective, listed companies may have already recorded a tax provision for the previous year ended 31 March 2016 on the basis of ICDS while submitting their annual financial statements for the year. These companies may be required to evaluate the impact of the press release on the financial results for the quarter ended 30 June 2016. Similarly, unlisted companies, that have not yet finalised their annual financial statements for the year ended 31 March 2016, should consider the impact of the press release on these financial statements.

While the deferment of ICDS does provide India Inc. additional time to plan its implementation, this deferment comes at a time when several companies might have already assessed the ICDS impact and planned their tax payments. This is likely to pose some difficulties for such companies. The CBDT should therefore provide further clarification and issue necessary amendments on a timely basis to address these uncertainties and enable smooth implementation of the ICDS framework in FY 2016-17.

To access the text of the MoF Press Release, please click here

To access the special edition of our First Notes on the overview of key matters and the implementation of ICDS dated 9 April 2015, please click here.