New tax norms will be a burden for India Inc

The tax accounting standards (TAS) recommended by a finance ministry-appointed panel will increase the burden of companies in the initial years, say experts.

The panel, appointed by the Central Board of Direct Taxes (CBDT), suggests assessees need not keep two books of accounts - one for accounting standards and the other for TAS.

Analysts warn that complying with the new standards will be a cumbersome process for companies, particularly smaller ones. "While the stated objectives are to provide more certainty and less chances of litigation, the TAS is likely to increase the tax burden on payers (at least in the initial years) due to a shift away from the concept of prudent or conservative outlook in accounting," Neeru Ahuja, partner in Deloitte, Haskins & Sells, told Business Standard.

The panel seeks to prepone the income side items on the one hand, while seeking to postpone or not allow expenses, compared with traditional accounting standards currently used, said Ahuja. In its final report, the panel has recommended that notional losses will not be allowed to be deducted from income for tax purposes, a norm different from accounting standards.

Accounting standard (AS 1) allows recognition of expected losses. However, the same standard does not recognise anticipated profits.

The CBDT panel says as the accounting standard amounts to differential treatment for recognition of income and losses, the tax accounting norms will not recognise expected losses or mark-to-market losses.

The same rule will apply for forward exchange or similar contracts entered into for trading or speculation purposes. Accounting standard AS-11 says these contracts be marked-to-market at each balance sheet date, and the resultant exchange differences should be recorded in profit or loss.

As such mark-to-market gains or losses are unrealised in nature, the CBDT panel recommended that tax accounting standards recognise all gains or losses on such contracts only on settlement.

Analysts said revenues are sought to be preponed in case of inventories. Currently, the accounting standard does not allow any valuation of inventories for service providers. The CBDT panel recommended method of valuation of inventories of a service provider based on international best practices be incorporated in the TAS.

"In the Indian economy, the service sector plays a vital role and the committee is of the view that to give certainty to taxpayers in respect of computation of income, a method of valuation of inventories should be provided for," said the panel.

According to the panel's recommendations, TAS will also deal with securities held as stock-in-trade for tax purposes, not recognised by accounting standard AS-13.

Securities held as stock-in-trade draw higher tax at the rate of 30 per cent, against 15 per cent long term capital gains tax on listed securities held as investment. This is the current practice as well but TAS has recognised this to give greater clarity, said an analyst.

While the committee recommended that tax assessees need not maintain two books of accounts, analysts say there will be a number of tax adjustments and workings that will need to be carried out by taxpayers to comply with the new TAS.

"For example, inventory valuation for tax may be completely different and have to be re-done, similarly workings for foreign exchange gains and losses and many more. These will also need to be audited by the tax auditor before returns are filed," said Ahuja.

According to her, the new TAS will create more complexity for tax payers, especially smaller tax payers. "They (tax payers) will need to understand the impact and comply with two sets of accounting standards - those under the Income Tax Act and the ones under the Companies Act, formulated by the Institute of Chartered Accountants, (ICAI)," she said.

The panel, headed by H Srinivasalu, who is an income tax commissioner in Hyderabad, recently released its final report containing the recommendations and proposals. The committee has proposed that at least 14 TAS be notified, different from the currently used accounting standards issued by the ICAI.