www.pwc.

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ICAI National
Convention 2015
WIRC – Ahmedabad Branch

ICDS – Practical Issues

August 7, 2015
Presented by:
Vishal J. Shah
Partner
PricewaterhouseCoopers Pvt. Ltd.
Agenda

• Background and Global Experience

• Introduction to ICDS

• Some Macro Questions

• Some Specific ICDS Deviations

• ICDS Convergence with Ind AS

• Gearing up

Income Computation & Disclosure Standards August 2015

Slide 2
Background and Global Experience

Income Computation & Disclosure Standards August 2015

Slide 3
Flashback

• 2010: IFRS convergence was on anvil

- IND-ASs released by MCA

• Need for a Tax Convergence roadmap

• CBDT appointed AS committee with the following objectives

1. Study harmonisation of ICAI-AS with tax laws & suggest AS to be

notified

2. Determination of MAT base (book profits) upon Ind AS (IFRS)

adoption

3. Suggest amendments to IT Act for transition to IND-AS regime

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Slide 4
AS Committee Suggestions (2012)

• Notify 14 TASs under the IT Act (out of 31 ICAI-AS)

• IFRS Convergence related objectives not addressed by Committee given the

uncertainty on Ind AS implementation in 2012

- Amendment to Act relating to MAT computation upon Ind AS clarity

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Slide 5
Global Experience – Tax & Accounting Interplay

Indian Context

Taxable income determined, Eg. MAT

Dependent predominantly, based on books of
accounts as per local GAAP

Taxable income based on book Eg. Business Income

Quasi-Dependent profits, with number of computation under
adjustments under tax laws IT Act

Specific set of rules within the tax Eg. DTC Income-

Independent law, with no or little correlation Expense model
with books of accounts

Global movement for enhanced tax-book alignment; India will stand out ?
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Slide 6
Where countries stand ?

Tax – Accounting Interplay #

Accounting
Base for
Stand-alone Dependent Quasi-dependent Independent
accounts

Luxembourg, Austria, Belgium, US, Denmark,

Romania, Sweden, France, Hungary Netherlands,
Local GAAP Switzerland Norway, Poland,
Russian Federation,
Trinidad & Canada, Panama, Australia, Malaysia,
Tobago, Kenya Bulgaria, Cyprus, Netherlands Antilles
Czech Republic,
IFRS
Italy, Malta,
Portugal, Mauritius,
Zimbabwe
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Slide 7
Introduction to Income Computation
and Disclosure Standards (‘ICDS’)

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Slide 8
ICDS – the TAS avatar
Income Computation & Disclosure Standards (ICDS)

• New Tax Accounting Standards under Section

145(2) of the Income-tax Act, 1961 (‘the IT Act’)
• Objective to eliminate accounting variations;
ensure consistency & clarity
• 10 ICDS notified – Effective from April 1, 2015
(FY 2015-16)

• Applicable to all taxpayers (and not just companies)

• Separate books of accounts not mandatory
• Thrust on disclosures – Tax Audit and Return forms
likely to be amended
• IT Act to override ICDS provisions (in case of
inconsistency)

Income Computation & Disclosure Standards August 2015

List of ICDS notified by Indian Government
ICDS Corresponding Indian
GAAP (ICAI-AS)
I Accounting policies AS-1
II Inventories AS-2
III Construction Contracts AS-7
IV Revenue Recognition AS-9
V Accounting for tangible fixed assets AS-10
VI Effects of changes in FX rates AS-11
VII Government Grants AS-12
VIII Securities AS-13
IX Borrowing costs AS-16
X Provisions, Contingent Liabilities & Assets AS-29

ICDS primarily based

on current Indian
GAAP (ICAI-AS) with
deviations

Income Computation & Disclosure Standards August 2015

 ICDS – One more step…

Typical Corporate tax computation under ICDS regime

Particulars Amount

Profit or loss as per P&L Account XXX ICDS – A step to

harmonize
Add / Less: Adjustments to neutralize specific
accounting treatment not aligned with ICDS Accounting
Standards with
Eg. (1) Capital vs Revenue Expenditure XXX IT Act
(2) Provision for expected losses XXX

(3) Foreign Exchange Fluctuations XXX

Add /Less: Specific adjustments under IT Act

Eg (1) Depreciation /Investment allowance, Tax holiday, etc. XXX

Taxable Income XXX

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Slide 11
Some Macro Questions

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Slide 12
Some Macro Questions...

•Whether notifying ICDS was a given ?

- No discussion on alternative – specific amendments to IT Act for deviations

- Legislation approach settled over atleast 90 years (1922 & 1961 Act)
eg. S. 32, S. 43B, Employee benefits, S. 36(1)(iii) – Interest, etc.

- Infact recognised by the Committee itself eg. Employee benefits, Merger

accounting

- Ind AS convergence objective, in any case, not achieved

- Room for discretion / litigation – interpreting the ICDS - an

extended law !!

Legislating deviations (like depreciation S. 32)

can be a better approach !
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Slide 13
…Some Macro Questions...
• Provisions of the Act prevail over ICDS
- S. 145 deals with “computation of income” and not a charging section
- Whether ICDS a deeming fiction ?
Situation Key Aspects / Instances
Where there is a • S. 43A, S. 40(a)(ia)
specific Section in • Tonnage tax (S. 115VF), Oil & Gas deemed income
the Act (S. 44BB)
• Film Producers / Distributors (Rule 9A / 9B)
Where the Act is Based on ordinary principles of commercial
silent accounting
(Applicability of Subject to general provisions of the Act
Judicial precedents)
• Capital vs. revenue S. 2(24), accrual (S. 4, 5), etc.

Whether Judicial Precedents would prevail over ICDS?

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Slide 14
…Some Macro Questions...

• MAT mismatch
- MAT continue to be governed as per books of accounts following ICAI AS
- Accelerated income recognition in ICDS may result in double levy of tax;
no opportunity to offset MAT credit
- Resort to Nagarjuna fertilizers (AP HC) case law – No double taxation
under normal computation and MAT in different years
•Applicability to all Taxpayers

- Cash system of accounting can continue

- Mandatory audit requirements for small proprietors, firms, etc.

- Even if no adjustments – would entail disclosure requirements

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Slide 15
...Some Macro Questions

• No separate set of books – whether practical ?

- Prudence, Materiality, etc., deviations – Tax auditor role ?

- Revenue recognition, inventory, etc. adjustments

- Disclosures for non-corporate taxpayers – where ?

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Slide 16
Some Specific ICDS Deviations

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Slide 17
ICDS I – Accounting Principles

• Prudence given a GO-BY?

- Prepone income accrual (contingent assets, etc); Postpone Expense /
anticipated loss claims
- Whether warranted in absence of a Loss carry back provisions

• Income earned during the previous year is subject to tax

- MTM loss or expected loss shall not be recognised unless specifically
permitted
- Need to distinguish Legal liability (to be discharged later) versus Contingent
liability

• Change in Accounting policies – “Reasonable cause” - meaning?

- Needs clarity based on settled jurisprudence; Separate books ?

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Slide 18
ICDS II – Valuation of Inventories

• Standard Cost Method not recognised

- In absence of any tax avoidance possibility, why change ?

• Dissolution of P. Firm, AOP, BOI (irrespective of whether business is

discontinued or not)
- As 2 is silent; Position under ICDS – NRV on date of dissolution

• Valuation of inventories on commencement of business

- AS 2 is silent; Position under ICDS – Cost of inventory;

- Likely conflict with S. 45(2) read with S. 28 ?

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Slide 19
 ICDS III – Construction Contracts…

• Applicability – POCM method to all taxpayers

- Non-corporate assessees (LLPs, Partnerships) following CCM method

- Covers architects, project managers, etc. rendering services directly connected to

construction contract

- Applicable to real estate developers ? Presumptive tax assessees (S. 44BB)?

• Recognition of contract revenues (including incentives, claims) if there is

reasonable certainty of ultimate collection – in line with ICAI AS-7
- Once recognized, bad debts allowed only if sum w/off in books

- Amendment in S. 36(1)(vii) to do away with bad debt claim anomaly [Fin. Act, 2015]

• Retention monies to be recognised on POCM basis

- Favourable decisions - Taxed only upon fulfilment of contractual conditions
[Simplex Concrete Tiles India Pvt Ltd (179 ITR 8) (Calcutta HC)]
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Slide 20
...ICDS III – Construction Contracts…
• Anticipated losses in context of construction contracts
- Judicial decisions – Held as allowable so long as accounting in accordance with
general principles or based on prudence

• Actual Losses – allowed on POCM basis

- Eg. – Loss by theft, fire, actual loss more than % of project completion, etc.

- Whether still allowable under S. 28?

• Borrowing costs related to construction contracts to be allocated

- Whether construction contract a “qualifying asset” under ICDS IX?

- Alignment with treatment under S. 36(1)(iii) ?

• Incidental income (Interest, dividends, CG) not to be reduced from

cost of construction
- Whether Bokaro Steel (236 ITR 315) (SC) overruled?
Income Computation & Disclosure Standards August 2015
Slide 21
...ICDS III – Construction Contracts
MAT mismatch:
In case of taxpayer following CCM method in books of accounts:
% of project
Income under Book Profits
Year completed Remarks
ICDS under MAT
in the year
1 20% NIL NIL
2 20% 40,000 NIL Higher income
under normal
3 30% 30,000 NIL computation
4 20% 20,000 NIL
5 10% 10,000 100,000 Taxable under MAT
Total 100% 100,000 100,000

Taxpayer ends up paying tax twice on the same income due to mismatch in
normal income and MAT computation
Other instances for MAT mismatch under ICDS – Retention money, provision
for anticipated losses, etc.
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Slide 22
ICDS IV – Revenue Recognition…
Sale of Goods
• Revenue to be recognised upon transfer of property or upon transfer of
significant risks / rewards of ownership – in line with ICAI AS-9
• Revenue to be recognised only if there is a reasonable certainty of its
ultimate collection
- Uncertainty with regard to price escalation claims or export incentives, revenue
recognition to be postponed

Service Income
• Revenue to be recognised on POCM basis (mutatis mutandis Construction
contracts)
- Practical hardship in maintaining engagement-wise records - Cost allocation,
intangible parameters, etc.
- No clarity on specific instances of Outcome-based billing, etc.
- Need to revisit; significant impact on SME sector
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Slide 23
…ICDS IV – Revenue Recognition

Use of Resources by Others [Interest, Royalty, Dividends]

• Interest income to be recognised on time basis

• Royalty income to be recognised as per agreement terms

• Dividend – Recognised as per the Act [S. 8]

• ICDS silent on whether the condition of reasonable certainty of ultimate

collection applies to interest & royalty income

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Slide 24
ICDS VI – Effects of changes in Forex Rates
• MTM Forex adjustment (AS-11) to be allowed (except on Forward
Contracts for probable, trading & speculative transactions) –
- Limited deviation under ICDS vis-à-vis CBDT Internal Instruction 3/2010

- Covers all possible hedging instruments ? Commodity Hedging?

- Parity in treatment of Gains & Loss; but notional income taxed

- No distinction between short term vs long term– to avoid volatility

• Forex adjustment on ECB for imported assets – S. 43A to apply

• Forex adjustment on ECB for domestic fixed assets – covered by ICDS ?

- Capital vs. Revenue distinction not relevant ?

• In case of non-monetary items (investments, etc.) – No adjustment under

ICDS ?
- Inventory in an overseas Branch at NRV ?
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Slide 25
ICDS VII – Government Grants...
Key Aspects:
• ICDS provides Government Grants not to be recognised until there is reasonable
assurance that
- Person shall comply with the conditions attached to them; and
- Grants shall be received [Para 4(1)]
• Recognition not to be postponed beyond date of actual receipt
[Para 4(2)]
• Govt. grant to be recognized on receipt basis irrespective of conditions fulfilled?
Recent Amendment
• Amendment in S. 2(24) – Fin. Act, 2015
- Subsidy, grant, cash incentive, duty drawback, waiver, concession, reimbursement
(other than reduced from actual cost) to be treated as income
- Relevance of “Purpose” test ignored
- Favourable judicial decisions overruled [Ponni Sugars (306 ITR 392)(SC), Sahney Steels
(228 ITR 253)(SC), Reliance Industries (339 ITR 632)(Bom.)]
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Slide 26
…ICDS VII – Government Grants

Recognition under different situations:

Sr
Nature of Grant Position under ICDS
No
1 For depreciable asset • Reduced from actual cost / WDV

2 For non-depreciable asset • Recognised as deferred income

(subject to fulfilment of obligations)

3 Non-monetary asset at concessional • Not as income

rate • Asset to be recorded at acquisition cost

4 Other Grants (residuary clause) • Recognised as income

For non-depreciable asset • Credited to Capital Reserve (AS-12)

(with no obligations) • ICDS silent; Recognised as income
Grants in nature of promoters’ under residuary clause?
contribution

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Slide 27
ICDS VIII – Securities...

Key Differences vis-à-vis ICAI AS-13:

Relevant Aspect Position under ICAI AS-13 Position under ICDS
Applicability Covers long-term, current Deals only with securities
investments but excludes held as stock-in-trade
securities held as stock-in-trade
Approach for year- Individual security wise Portfolio approach
end valuation
Year-end valuation Cost or NRV, whichever is lower Actual cost
of unlisted
securities
Determination of Weighted Average method FIFO Method
cost where specific
identification not
possible

ICDS not applicable to securities held by Mutual Funds, VCF, Banks, Public
Financial Institutions, FIIs;
However, would apply to stock brokers, NBFCs, traders
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Slide 28
…ICDS VIII – Securities...
Key Issues:
• Portfolio approach vis-à-vis individual security wise valuation
- MAT mismatch
Individual Security Cost NRV Valuation
Company A 100 20 20
Company B 100 30 30
Company C 100 40 40
Company D 100 300 100
Valuation (ICAI AS-13) 190

Valuation (under ICDS) 400 390 390

• Practical difficulty in valuing securities on FIFO basis vis-à-vis weighted

average method
Income Computation & Disclosure Standards August 2015
Slide 29
…ICDS VIII – Securities

Other Aspects:
• Actual cost – comprises of purchase price and acquisition charges such as
brokerage, fees, tax, duty or cess
- STT also included in actual cost

• Pre-acquisition period interest

- ICDS allows interest for pre-acquisition period to be reduced from actual cost
- ICDS treatment in line with prevalent industry practice – not offered as income

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Slide 30
ICDS IX – Borrowing Costs...
Overview:
• Borrowing costs attributable to acquisition, construction or production of a
qualifying asset to be capitalised
- Includes interest and other ancillary costs
- Qualifying asset include
◦ Tangible and Intangible assets irrespective of period of bringing into existence; and
◦ Inventories that require 12 months to bring them to saleable condition

• Eligibility for Capitalisation

- Specific borrowings – Capitalised to respective asset
- General borrowings – Pro-rata formula under ICDS vs. Wt. Avg. method (AS-16)

• Cessation of Capitalisation
- For tangible and intangible asset – When such asset is first put to use

- For inventory – When substantially all activities are completed upto saleable condition
Income Computation & Disclosure Standards August 2015
Slide 31
…ICDS IX – Borrowing Costs

Key Aspects:
• Amendment in S. 36(1)(iii) – Fin. Act, 2015
- Words “for extension of existing business or profession” removed in first proviso
- Interest costs pertaining to acquisition of asset now to be capitalised
- Favourable judicial decisions overruled [Core Health Care (215 CTR 1) (SC), etc.]

• Income from temporary deployment of surplus funds – Not to be reduced

from borrowing cost
- Treatment aligned with Tuticorin Alkali decision (227 ITR 172)(SC)

• Ancillary borrowing costs to be capitalised

- Expenses in connection with debt (brokerage, issue expenses) – not capital
expenditure [Refer India Cements (60 ITR 52)(SC)]
- To be amortised under ICDS ?

Income Computation & Disclosure Standards August 2015

Slide 32
 ICDS X – Provisions, Contingent Liabilities and
Contingent Assets...
Key Differences vis-à-vis ICAI AS-29:
Sr
Relevant Aspect Position under AS-29 Position under ICDS
No
• Silent; Not applicable
Applicability to • Deduction for onerous
1 • Applicable
‘Onerous’ Contracts contracts allowed in year of
actual loss
“Probable” that an outflow of “Reasonably certain” that
Recognition of resources will be required outflow of resources will be
2 i.e. if it is more likely than required
‘Provisions’
not
Recognition of “Virtually certain” that “Reasonably certain” that
3 Contingent Assets / inflow of resources will arise inflow of resources will arise
Reimbursements

Income Computation & Disclosure Standards August 2015

Slide 33
…ICDS X – Provisions, Contingent Liabilities and
Contingent Assets
Key Aspects:
• Provisions – ‘reasonably certain’ vis-à-vis ‘probable’
- Impact on provision for warranty ?
- Provision for restructuring costs – dealt with under specific provisions of the Act
[S. 35DD]

• Contingent Assets – ‘reasonably certain’ vis-à-vis ‘virtually certain’

- Lower threshold would prepone income recognition – Contrary to “prudence” concept

• Example: Impact in case of insurance claims

Event Year
Loss of asset / property 2015
Claim rejected by Tribunal 2017 When is it
“reasonably
Claim accepted by High Court 2019 certain”?`
Claim accepted by SC 2022
Income Computation & Disclosure Standards August 2015
Slide 34
Unfinished Agenda

• Amortisation of Goodwill arising on Amalgamation

• Salaami Payments on long term lease
• Pension benefits
• Leases (in draft stage)

• Share-based payments
• Revenue recognition by Real Estate developers
• Service concession agreements
• Exploration for and evaluation of mineral resources

Income Computation & Disclosure Standards August 2015

Slide 35
Draft TAS (Leases) – ICAI AS 19

• Classification of Leases – Provides for uniform approach of classification

by lessor and lessee
- Lessor and lessee to provide joint confirmation of the classification

◦ Provides for specific indicators for finance lease classification

• Depreciation - Available only to lessee in case of finance lease

- Industry impact; Amendments to IT Act
- Dispute in classification by lessor / lessee – past transactions?

Currently, in draft stage - Not yet notified by CBDT

Income Computation & Disclosure Standards August 2015

Slide 36
ICDS Convergence with Ind AS

Income Computation & Disclosure Standards August 2015

Slide 37
 Roadmap to Ind AS adoption
Comparatives 31 March 2015 or 31 March 2016 or 31 March 2017 or
for the period thereafter thereafter thereafter
ending

1 April 2015 1 April 2016 1 April 2017

Mandatorily applicable for following companies

● Voluntary ● Companies whose net ● Companies whose equity and/or
Applicable to Adoption worth is Rs. 500 crore debt securities are listed or are in
companies or more the process of being listed on any
stock exchange in India or outside
● Holding, subsidiary, joint
India and having net worth of less
venture or associate
than Rs. 500 crore.
companies of above
companies ● Unlisted companies having net
worth of Rs. 250 crore or more
● Holding, subsidiary, joint venture
or associate companies of above
companies

Solution series - Ind AS  Thrust on fair value accounting April 2015
PwC Slide 38
Ind AS Convergence – Key Impact Areas

• Taxable income based on profit / loss under Ind AS or ICAI AS

- ICDS will warrant adjustments to Ind AS

• Income base for MAT

• Deviation in tax liability based on Ind AS / ICAI AS
• Mismatch in Revenue recognition - characterisation & timing
- Withholding (TDS) implication
- Indirect taxes (VAT/ Service tax) • Recognition
• Classification
• Comparable benchmarking analysis under TP • Measurement
• Transition
• Mandatory fair value recognition for business
reorganisation

Tax Convergence under Ind AS regime needs a policy response

Income Computation & Disclosure Standards August 2015
Slide 39
 Convergence options

Option 11
Option

Key Objectives
Dual set of accounts
• Overall tax neutral transition to
Ind AS
• Reduce uncertainty & litigation
Option 22
Option • Equality in taxation

Ind AS specific tax • Ease of compliance

adjustments • Tax administration preparedness
(in ICDS)

Convergence Roadmap – Need of the hour !!

Slide 40
Gearing up…

Income Computation & Disclosure Standards August 2015

Slide 41
 Gearing up

Where Ind-AS
● Review of deviations from ICAI-AS to ICDS
not adopted –
ICAI-AS to ICDS ● Impact analysis of ICDS

● Current ICDS based on ICAI-AS

Where Ind-AS
adopted – ● Impact analysis of deviations of Ind AS from ICAI-AS
Ind AS to ICDS
● Tax impact analysis of deviations of ICDS from Ind AS

Solution series - Ind AS  April 2015

PwC Slide 42
Thank You

Vishal J Shah
Partner
Direct Tax and Regulatory Services
Direct: +91 22 6689 1455 | Mobile: +91 99 6754 5861
Email: [email protected]
PricewaterhouseCoopers Private Limited
PwC House, Plot 18/A, Guru Nanak Road,
Station Road, Bandra West, Mumbai 400 050