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    Oct 19, 2011

    CBDT HAS ISSUED DISCUSSION PAPER ON ACCOUNTING STANDARD

    Central board of direct taxes has issued discussion paper on accounting standard for the option and reviews by the stake holders. However it is accepted by the finance minister Mr. Pranab Mukharjee. Full issue of Discussion paper is as under.

    DISCUSSION PAPER
    ON
    TAX ACCOUNTING 
    STANDARDS
    OCTOBER 2011
    Government of India
    Ministry of Finance
    Department of Revenue
    Central Board of Direct Taxes- 1 -
    1. Background
    1.1 Section 145 of  the Income-tax Act, 1961 („the Act‟) provides that  the method 
    of accounting for  computation  of income under the head “Profits and gains of 
    business or  profession” and  “Income from other sources” can either be  the  cash or 
    mercantile system of accounting.  The Finance Act, 1995 empowered the Central 
    Government to notify Accounting Standards for any class of assessees or for any class 
    of income.  Explaining the reason for introduction of this provision, it was stated that 
    there is flexibility in the standards issued by the Institute of Chartered Accountants of 
    India (ICAI) which makes it possible for an assessee to avoid the payment of correct 
    taxes by following a particular system and therefore, there is an urgent need to 
    standardize one or more of the alternatives in various standards so that income for tax 
    purpose can be computed precisely and objectively.

    1.2 Since the introduction of these provisions, two Accounting Standards relating 
    to disclosure of accounting policies and disclosure of prior  period and extraordinary 
    items and changes in accounting policies have been notified.   In July 2002,  the 
    Central Government had constituted  a committee on formulation of Accounting 
    Standards under the Act [„the Committee (2002)‟].

    1.3 The Committee (2002) submitted its final report in November 2003  which 
    contained the following main recommendations:
    (i) It would be impractical for a tax payer to maintain two sets of books of 
    account  – one in accordance with the  Accounting Standards issued by  the 
    ICAI and another set in accordance with  the  Accounting Standards to be 
    notified under the Act.  The Committee (2002), therefore, recommended that 
    the Accounting Standards issued by the ICAI should be notified under the Act 
    without any modifications.

    (ii) Appropriate legislative amendments should be made to the Act to prevent any 
    scope for leakage of revenue on account of  notification of Accounting 
    Standards issued by the ICAI.- 2 -

    1.4 The recommendations of the Committee (2002) could not be implemented 
    because of the following:-

    (i) The implementation of the recommendation of  the Committee (2002) would 
    have required extensive amendment to the Act resulting in  complexity and 
    litigation, and would have negated the concept of notification of accounting 
    standards under the Act to provide certainty.

    (ii) As the Accounting Standards issued by ICAI keep on evolving /changing by 
    way of issue of new standards, interpretation and revision, it would have been 
    cumbersome for the Ministry of Finance to keep track of all changes in the 
    Accounting standards issued by the ICAI and to move simultaneous 
    amendments to the Act.

    1.5 There  have been significant developments since the Committee (2002) 
    submitted its report, notable among them are:
    (i) The Government of India, through the Ministry of Corporate Affairs (MCA),
    has notified twenty eight Accounting Standards issued by the ICAI, under the 
    Companies Act, 1956.

    (ii) The Government of India has decided to converge Indian Accounting 
    Standards with the International Financial Reporting Standards (IFRS). In 
    February, 2011, the MCA, being the nodal agency for this convergence, has 
    placed thirty five Indian Accounting Standards converged with International 
    Financial Reporting Standards (termed as IND AS) on its website.

    (iii) In the absence of  notification of  Accounting Standards under the  Act, 
    uncertainty and litigation continues on various accounting related issues such 
    as accounting for construction contracts, foreign exchange fluctuations and 
    government grants.- 3 -

    2. New Accounting Standards Committee
    2.1 The  Central Board of Direct Taxes (CBDT) constituted  a new Accounting 
    Standard Committee („the Committee‟)  comprising of departmental officers and 
    professionals vide Order No. 134/48/2010-SO (TPL) dated 20
    th
    December 2010.  The 
    terms of reference of this Committee are as under:

    i) to study the harmonization of Accounting Standards issued by the ICAI 
    with the direct tax laws in India, and suggest Accounting Standards 
    which need to be adopted  under  section 145(2) of the Act along with 
    the relevant modifications;

    ii) to suggest method for determination of tax base (book profit) for the 
    purpose of Minimum Alternate Tax (MAT) in case of companies 
    migrating to  IFRS  (IND  AS)  in the initial year of adoption and 
    thereafter; and

    iii) to suggest appropriate amendments to the Act in view of transition to 
    IFRS (IND AS) regime.

    3. Main recommendations of the Committee
    3.1 The Committee submitted its Interim Report in August 2011.  The main 
    recommendations of the Committee with regard to the first term of reference are as 
    under.

    3.2 Since the Accounting Standards to be notified under section 145(2) of the Act 
    would need to be in harmony with the provisions of the Act,  the Accounting 
    Standards issued by the ICAI cannot be notified without modification.  The notified 
    Accounting Standards should provide specific rules, which would enable computation 
    of income with certainty and clarity.  To ensure horizontal equity and uniformity, the 
    notified Accounting Standards would  also  need elimination of alternatives, to the - 4 -
    extent possible.  Accordingly, separate Accounting Standards should be notified under 
    Section 145(2) of the Act.

    3.3 It would be burdensome for affected tax payers to maintain two sets of books 
    of account i.e. one in accordance with the Accounting Standards issued by the 
    ICAI/notified under the Companies Act, 1956; and another in accordance with the 
    Accounting Standards notified under the Act.  Accordingly, the Accounting 
    Standards notified under the Act should be made applicable only to the computation 
    of taxable income and a taxpayer should not be required to maintain books of account 
    on the basis of Accounting Standards notified under the Act.

    3.4 Two different sets of Accounting Standards may cause confusion for taxpayers 
    and other stakeholders.  Accordingly, the Accounting Standards notified under the 
    Act should be termed as “Tax Accounting Standards” (TAS) to distinguish them from 
    the Accounting Standards issued by the ICAI/notified under the Companies Act, 
    1956.

    3.5 Since  the TAS  are based on the mercantile  system of accounting,  the TAS 
    should be applicable to all tax payers who follow the mercantile system of accounting, 
    and should not be applicable to those taxpayers who follow the cash basis of 
    accounting.

    3.6 As the TAS are intended to be in harmony with the provisions of the Act, it 
    should be expressly provided in the TAS, that in case of conflict, the provisions of the 
    Act shall prevail over the TAS.

    3.7 Currently, the starting point for  computation of income under the head 
    “Profits and gains of business or profession” and “Income from other sources” is the 
    income as per the  financial statements.  Since the provisions of the TAS may not be 
    the same as the corresponding provisions used for preparation of the financial 
    statements,  a reconciliation between the income  as  per the financial statements and 
    the income as computed per the TAS should be presented.  - 5
    -
    4. Draft TAS
    4.1 Draft of the TAS on Construction Contracts and Government Grants, 
    recommended by the Committee, are annexed hereto. Draft of other TAS will be 
    issued for comments/suggestions by all stakeholders in due course.

    4.2 Comments/suggestions are invited on the recommendations of the Committee 
    and draft of the TAS annexed hereto. The comments/suggestions may be e-mailed at 
    dirtpl3@nic.in by 11
    th
    November, 2011

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