India does not need Income Computation & Disclosure Standards (ICDS)
This petition had 5,105 supporters
The Finance Minister, Shri Arun Jaitley
The Minister of State for Finance, Shri Santosh Kumar Gangwar
Petition for scrapping Income Computation and Disclosure Standards (ICDS) – Sec. 145(2) of the Income-tax Act, 1961 [the Act]
1. Sec. 145(2) authorises the Central Government to notify Income Computation and Disclosure Standards [ICDS] for the purposes of computation of income.
CBDT has notified 10 amended ICDS vide notification dated 29th September, 2016 applicable to assessment year 2017-18 and subsequent assessment years, to be followed by all assessees (other than an individual or a HUF who is not required to get his accounts of the previous year audited in accordance with the provisions of section 44AB of the Act) following the mercantile system of accounting, for the purposes of computation of income chargeable to income-tax under the head “Profits and gains of business or profession” or “Income from other sources”.
2. The basic principle of income-tax is to tax the real income and commercial profit of the assessee subject to certain specific allowances / disallowances. The accounts of the assessee are maintained on the basis of the Accounting Standards prescribed under the Companies Act and / or issued by The Institute of Chartered Accountants of India [ICAI], a statutory body established under the Act of the Parliament to regulate the accounting profession. Therefore, the profit disclosed in the books of account maintained by the assessee adopting such Accounting Standards reflects the true commercial profit earned by the assessee. Generally, that should be accepted as income for the purpose of the Act, subject to certain necessary allowances and disallowances.
3. ICDS is not adding any value and in fact, is bound to create uncertainty and deterrence in the conduct of business in India. It militates against the professed policy of the Government to simplify the taxation system. While amendments in the law, guidelines and standards are made with the intent of reducing litigation, it is feared that these notified ICDS will not achieve the intended objectives. It is apparent that with a huge divergence in the accounting prescribed under Ind AS regime, differences with Accounting Standards, overwriting of the law established through judicial precedents and coinage of new terminologies, there will be a substantial increase in unintended tax litigation. Again there will not be any significant revenue benefit in the long run by enforcing ICDS.
4. It is totally unjust, unfair, unrealistic and very onerous to impose another set of standards i.e. ICDS on the assessees for the purpose of computation of total income. These ICDS in fact change the above basic principles and affect the computation of total income of assessees. Although it is stated that such ICDS are not meant for maintenance of books of account, if one peruses even the amended ICDS notified by the CBDT, it becomes clear that effectively such ICDS will have a direct bearing on the maintenance of books of account. As such, with these ICDS, effectively the assessee would be required to keep and maintain dual set of books of account to comply with the requirement of ICDS and /or will have to spend considerable amount of time, energy and man hours in preparing and reconciling income as per ICDS and the one computed as per books of accounts maintained as per the applicable Accounting Standards. This becomes clearer with the amendment made in Form No. 3CD (part of Tax Audit Report) in this respect.
5. Accounting Standards are applicable to all corporate and non-corporate entities based on the classification of such non-corporate entities as provided by the ICAI; whereas ICDS is applicable to all taxpayers following mercantile method of accounting (i.e. to all tax payers other than those following the cash system of accounting).
It has been stated in each ICDS that the ICDS would not apply for the purpose of maintenance of books of accounts. While theoretically this may be the position, the question arises as to whether it is practicable or even possible to compute the income under ICDS without maintaining a parallel set of books of account, given the substantial differences between AS being followed in the books of accounts and ICDS. Most taxpayers would end up at least preparing a parallel profit and loss account and balance sheet, to ensure that ICDS and its consequences have been properly taken care of while making the adjustments.
It would be highly burdensome to maintain two separate books of accounts and it would be humanly impossible for all the accountants to understand the finer aspects of ICDS and AS. There are bound to be practical problems in accounting and auditing of the same
Further, the amended Form 3CD requires a tax auditor to certify the adjustments to be made to the profit and loss in accordance with the provisions of ICDS. Before certification, a tax auditor would invariably require such parallel profit and loss account and balance sheet to be prepared, to ensure that all adjustments required on account of ICDS have been considered. This will result in substantial work for most businesses and may even result in the requirement of parallel MIS, one for the purposes of regular accounts, and the other for the purposes of ICDS.
6. Compliance with ICDS is an additional requirement, which will increase the compliance burden and cost in the hands of the tax payers and would thus defeat the purpose of ICDS in terms of simplification of processes.
7. In fact, Income-Tax Simplification Committee, set up by Ministry of Finance and chaired by Justice R. V. Easwar (Retd.) in its report containing first batch of recommendations has rightly made the following observations w.r.t. ICDS:
“Taxpayers are already grappling with regulatory changes of the Companies Act, 2013, Ind-AS and the proposed GST. Industry should be allowed more time to deal with another change of this nature. The Committee understands that the taxpayers feel that many of the provisions of the ICDS are capable of generating a legal debate about which at present there is no clarity.
Further, multiple accounting methods, one for the books of accounts and other for tax purposes, creates confusion, interpretation issues, multiplicity of records and additional compliance burden which may outweigh the gains to be obtained by the application of ICDS. It has also been felt by the Committee that ICDS deals only with the method of accounting and at best it brings timing difference on recognition of expenditure or income as compared to the books of account. The Committee therefore feels that a fuller study of the implications of the ICDS is necessary before it is implemented.”
8. We already have the classic example of bad and highly litigative experience of introduction of Sec. 145A by the Finance (No. 2) Act, 1998. We have still not been able to come out of the difficult situations it has unnecessarily created for a large number of assessees in terms of avoidable litigation without any corresponding benefit to the Revenue in long term.
9. Recently, the Indian Accounting Standards (“Ind AS”) were notified by the Ministry of Corporate Affairs wherein companies may voluntarily adopt Ind AS for financial statements for accounting periods beginning on or after 1 April 2015, with the comparatives for the periods ending 31 March 2015 or thereafter. Once a company opts to follow Ind AS, it will be required to follow the same for all the subsequent financial statements.
This will lead to litigation as there would be various term used in Ind AS / ICDS interchangeably and in different context. Therefore, there is bound to be lots of controversy in interpretation leading to litigation. It can be seen that some of the differences in accounting as per Ind AS / ICDS would only be timing difference but it will lead to undue litigation either by Assessee / Department on such issue before higher forum.
Separately, there could be earlier judicial rulings which are based on the relevant provisions of the accounting standards, where the courts interpreted the law on the basis of such accounting standards. These judicial rulings would now have to be reconsidered in light of the requirements of ICDS, as the method of accounting is now subject to ICDS in the Income-tax Act.
Thus, it would defeat the very purpose of ICDS of bringing certainty in tax and reduction of litigation.
10. Currently, profits reflected as per the normal accounting standards is accepted as a basis for determining taxable business income subject to specific provisions contained in the Chapter IV-D of the Act. However, on account of introduction of Ind AS, there could be some major differences in the profit reflected in the accounts as compared to normal accounting standards. Therefore, necessary changes should be made in the Act itself, to make adjustments to take care of such major differences and these amendments should be applied only to entities which are preparing their account as per Ind AS. Once this is done there is no need to have separate ICDS.
11. It is strongly felt that the revenue department has introduced section 145(2) and the ICDS, to reverse the impact of some of the decisions of the Supreme Court and various high courts, which were rendered in favour of the assessees. In the revenue’s zeal to take some corrective action, in respect of some perceived advantage taken by few assessees, a huge unproductive compliance burden without any substantial benefit to exchequer, has been imposed on the business community, which is certainly not helping in improving the image of India as a favourable investment destination.
Due to the reasons stated above, we demand that ICDS should be completely withdrawn.
At this very critical stage of the national economy when there is an urgent need for ensuring the ease of doing business in India and reducing all possible complexities and consequential legal disputes, on account of the following reasons, we urge that ICDS should not just be deferred but should be withdrawn completely:
• ICDS is bound to create uncertainty and deterrence in the conduct of business in India and also militates against the professed policy of the Government to simplify the taxation system.
• Taxpayers would be required to keep and maintain dual set of books of account to comply with the requirement of ICDS and /or will have to spend considerable amount of time, energy and man hours in preparing and reconciling income as per ICDS and the one computed as per books of accounts maintained as per the applicable AS.
• There is bound to be a lot of controversy in interpretation of the ICDS and this will merely lead to enhanced litigation.
• Since some of the differences in accounting as per Ind AS/ ICDS would only be timing difference, it will lead to undue litigation without any corresponding benefit to the Revenue in long term.
In the event section 145(2) is not deleted and the notified ICDS are not withdrawn, the implementation thereof will create onerous burden on the assessees for compliance and will increase the paper work manifold without any substantial advantage to the Revenue. The above provision is clearly against the declared policy of the government of minimum government and maximum governance.
We, therefore, demand that in the interest of making India a highly attractive place for doing business and for the furtherance of stated policies of the Government of ‘Make in India’ and ‘Ease of doing Business in India’, section 145(2) and the notified ICDS should be deleted.
At best, appropriate amendments should be made in the Act itself as suggested in para 10 above.
CA Ameet N. Patel
Past President & Chairman, Taxation Committee
Bombay Chartered Accountants’ Society
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