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Tax Department: Ready for IFRS?

Published on Sat, Oct 30,2010 | 12:54, Updated at Tue, Nov 02 at 17:17Source : CNBC-TV18 |   Watch Video :

Four months to go for India to convert to IFRS and the situation on ground is getting worse not better. This week’s big IFRS story is that Finance Ministry sources indicate that the ministry would prefer that IFRS be delayed. Now add that to the already existing problems of Company Law Amendments hanging fire, accounting standards that have yet to be notified and then under prepared tax department and it makes you wonder where this IFRS experiment is going to end up? That is the question I put to Salman Khurshid, Minister of Corporate Affairs and here is what he had to say in an exclusive interview to The Firm.

Khurshid: The changes that are required in the law will be worked out, there will not be a problem. What we need to do is the Finance Ministry and the banking sector on board. There are some important issues for them. I wish we had done this a long time ago, but for some reason, banks have assumed and we have made concessions. We have given them more time for convergence.
 
Doshi: Yes, banks don't need to comply on the 1st of April.
 
Khurshid: But they still want to express some issues.  What we have said to the Finance Ministy is to have a committee of secretaries look at it. See if we can find the solutions. If not, it will go to a GoM and then finally the Cabinet. But we are working pretty fast, and 1st week of November, the committee will meet and we will know where we stand.
 
Doshi: Will you be able to pass it through the winter session - the amendments to the Companies Bill, to enable it or resort to an ordinance?

Khurshid: We have to make amendments to a dying bill right? It’s the sunset bill etc. So the amendments, if we have the opportunity and time, we will do it during the winter session. If need be, we could even do them after the winter session, because ultimately, if it is only a temporary thing, then that is available to us through an ordinance. We would obviously want to do it through a proper legislation if we are able to do so. Provided, of course, Parliament will co-operate, because you can't send that bill even for a short while to a standing committee etc. But the final issue will rest with the Speaker of the House.
 
Doshi: Convergence, not adoption, banks are asking for more clarifications, we still have the amendments to go, notifications of the standards itself, so that they can start working on their books of accounts, and then of course the tax issue. Which the tax department claims that the Indian corporate environment is not ready for IFRS altogether, and they haven't done anything about being IFRS compliant so to speak. So are we really going to be moving to IFRS on the 1st of April?
 
Khurshid: Yes we will.
 
Doshi: How? Despite all of this?
 
Khurshid: We will, and let me tell you this. Most companies that have to comply by April 1, are already reporting in IFRS.
 
Doshi: But they will be paying tax in Indian GAAP...
 
Khurshid:
As far as tax is concerned that is an issue that the Finance Ministry will resolve. They have promised us it will be resolved, it won't be a problem. A convergence roadmap will be there, we have announced it, we will stick to it, we have an international commitment, and we will not go back from it.  

Salman Khurshid, Minister for Corporate Affairs was very optimistic that India will meet the April 1, 2011 deadline.  But then what? – Several companies will be reporting in IFRS and being taxed on Indian GAAP that is because most companies and accountants say there hasn’t been any communication from the taxman on whether IFRS Accounts will be accepted for tax purposes next year? So what are companies going to do Isha Dalal finds out..

SSN Moorthy, Chairman, CBDT

As far as IFRS is concerned, personally, I am of the opinion that there should be some more time factor for implementation. I don’t think the Indian companies are ready for implementation.

But that’s not the case at the Essar group, where group controller Paritosh Basu is confident of meeting the April 1, 2011 deadline.

Basu says that, in fact, there is no clarity from the income tax department on whether financial statements in IFRS will be acceptable for tax purposes starting next fiscal.

Paritosh Basu, Group Controller, Essar

Till such time the clarity comes in, I believe we have to continue to do our transaction processing and accounting under i-GAAP and tax filing will continue to be under i-GAAP

N Venkatram, Audit Partner at Deloitte

He shares the same view. In fact, he believes that given the lack of clarity on the tax department’s preparedness for IFRS, persisting with Indian GAAP for tax purposes will help avoid confusion.

N Venkatram, Partner, Deloitte

Because if you tell me that I have a choice of looking at whether we adopt IFRS early for tax purposes or give the taxman sufficient time to deliberate on it and then formulate the standards that he requires, I would say give him the time. Because we have to recognize that there is a cash flow implication for companies. They would rather pay tax on the same basis until there is clarity rather than pay cash upfront because tax is computed in a different way and then trying to recover that money over a period of time.

Shrenik Baid, ED, PwC

A known devil is better than an unknown devil. At least you know what’s in the current income tax laws. So you can manage those. If you don’t know what’s going to come up, it’s going to be far more challenging. And unless CBDT comes out with a circular, different assessing officers are likely to take different stands which will create further confusion for companies.

That's why many IFRS compliant countries across the world still use local GAAP for tax purposes-- that includes Australia, Chile, Denmark and the Netherlands
Tax regimes in the United Kingdom, Germany, France, South Africa and Singapore, on the other hand, depend partly on IFRS—that is, adjustments are made to IFRS financial statements to determine taxable profits.

Finally, only 7 countries—including China, Luxembourg and Turkey— levy tax based entirely on IFRS financial statements. 

N Venkatram, Partner, Deloitte

The challenge that companies are facing is that as we are moving onto a new set of standards which is IFRS, is that the taxmen in those countries are not really able to keep pace and need a little time in terms of recalibrating what they do in order to ensure that their tax revenues and collections are not impacted.

That’s because the fair value method of accounting in IFRS changes the rules of the game for taxation.

For instance, under Indian GAAP, companies book only losses, not profits, on derivative instruments. Under IFRS, on the other and, both profits and losses are to be recognized at market value in the profit & loss account.
If tax is levied on that set of accounts, companies would have to pay tax on unrealized profits.

For the tax department to levy tax based on IFRS financial statements next fiscal onwards, adjustments would need to be made in the current Income Tax Act to exempt such unrealized profits from tax profits. Or the tax department could continue to tax on Indian GAAP till an IFRS-enabled DTC is released in 2012

At a recent tax seminar, the CBDT chairman said no decision has yet been made

SSN Moorthy, Chairman, CBDT

The Direct Taxes Code is drafted as on date. We have not brought in any of the new IFRS concepts there. We have left sufficient elbow room there to go into these things by way of subordinate legislation. And maybe, left to myself, I used to say in many fora that we are not advanced enough to implement IFRS, I am not the authority, that it is for the institute to decide, whatever it is. And when these top 100 or 500 companies which are supposed to implement IFRS, when they implement it, then we will take a call, how some minor amendments are required in the amendment. But as it is, we have not incorporated anything relating to IFRS in the DTC Bill.

In the next 4 months India needs to decide which route to adopt - amend the Income Tax Act of 1961 to enable taxing IFRS accounts starting next April, continue to tax on Indian GAAP till an IFRS-enabled DTC becomes law, or like Australia and the Netherlands, allow a dual system in which companies report in IFRS but pay tax on Indian GAAP accounts.

 
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