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IFRS Diary: Taxing Times Ahead!

Published on Tue, Jul 22,2014 | 19:16, Updated at Tue, Jul 22 at 19:16Source : 

By: Jamil Khatri, Deputy Head of Audit & Global Head of Accounting Advisory Services, KPMG

In all the excitement around the budget provisions, one important development in the Finance Bill has not been adequately debated as yet.  The Finance Bill provides that the Central Government may notify 'income computation and disclosure standards' under Section 145(2) of the Income Tax Act (Act), which would need to be followed while determining taxable income.  Once the Finance Bill is enacted, it is expected that the Central Government will notify a set of standards under these provisions.  These standards would be based on the recommendations of a Committee previously formed by the Central Board of Direct Taxes, which submitted its report and the related Tax Accounting Standards (TAS) in August 2012.

While the original intention of drafting the TAS was to insulate taxable income from book income post implementation of IFRS converged standards (Ind AS), it appears that the Central Government may notify the TAS even prior to the full implementation of Ind AS in India. The TAS would apply only to computation of taxable income and certain additional disclosures, and no separate books of accounts would need to be maintained.  Some of the TAS may also require an amendment to the Act in certain areas.  Depending on facts & circumstances, the TAS may have a material impact on the tax liability of individual companies.  Some of the key impact areas are:

- TAS eliminate the concept of 'prudence'.  Consequently, losses such as mark-to-market losses on derivatives and estimated losses on long-term construction contracts would be considered only when realized

- Some construction contractors defer recognition of profits on contracts during the early stages.  The TAS prescribes that such a deferral is not permitted once the contract is more than 25% complete.  Similarly, in certain cases, the contractor may stop profit recognition if there is uncertainty in collection.  The TAS requires profit recognition even in such cases with a corresponding bad debt claim for the non-collection risk

- There was significant uncertainty and litigation around foreign exchange losses on borrowings.  In several cases, tax authorities challenged claims for foreign exchange losses on long-term borrowings for acquisition of capital assets.  The TAS reiterates that such losses are not deductible only if they relate to import of capital assets

- Currently, some companies (particularly banks) classify certain overseas branches as 'non-integral'.  Accordingly, any exchange gains or losses on translation of the operations of these branches are not taken to income.  The TAS prohibits this and requires all such gains & losses to be recorded in income

- For companies that trade in securities (example, proprietary trading books of brokerages and banks), the TAS provide that any mark-to-market losses on securities held as 'stock-in-trade' needs to be recorded on a 'category' basis.  Currently, many companies consider such losses for each security separately whereby losses are considered, but gains are deferred.  The TAS also prescribes the FIFO method for recording gains and losses

- The TAS provide a new methodology for capitalizing interest cost on borrowings.  Under this approach, interest cost needs to be capitalized for all capital work-in-progress even if the construction period is less than 12 months (which is the benchmark generally used for accounting).  Similarly, unlike the accounting standards, the TAS does not permit any portion of the exchange losses to be considered as interest cost

- The TAS provides that depreciation for finance leases would be available to the lessees and not the owner lessor

- Currently, companies record provisions (for example, for litigation) if the liability is probable.  However, any claim made by a company that would result in a gain (contingent asset) is only recognized when the claim is realized.  The TAS require even such contingent assets to be recorded when recovery is reasonably certain.

Companies should start assessing their current tax positions to determine how the TAS would impact their taxable income.  In certain cases, this may also require a change in the manner in which companies record transactions and collate data for their tax filings.  While the intention of the TAS seems to be to reduce uncertainty and tax litigation, a lot depends upon the spirit with which tax officers and the judiciary interpret and apply the provisions of the TAS.  Further, there are some open areas around the transition provisions and Minimum Alternate Tax implications that would need to be addressed by the Central Government prior to implementation of the TAS.  Even as companies plan for the proposed implementation of Ind AS, they would also need to factor the impact of TAS on their plans.

Author's note - The author was a part of the Committee referred to above.  Views are personal.


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