DISCUSSION PAPER
ON
TAX ACCOUNTING
STANDARDS
OCTOBER 2011
Government of India
Ministry
of Finance
Department of
Revenue
Central Board of Direct Taxes
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.
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.
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 20th 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 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.
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 1 1th
November, 2011.
**********
Tax Accounting Standard [TAS]
Tax Accounting for Construction
Contracts
Preamble
This Tax Accounting Standard is applicable for computation of income
chargeable under the head “Profits and gains of business or profession” or
“Income from other sources” and not for the purpose of maintenance of books of
account.
In the case of conflict between the provisions of the Income-tax Act, 196
1(
„the Act
‟) and this Tax Accounting Standard, the
provisions of the Act shall prevail to that extent.
Scope
1. This Tax Accounting Standard should be applied in
determination of income for a construction contract of a contractor.
Definitions
2 (1) The following terms are used in this Tax Accounting
Standard with the meanings specified:
(a) A
“construction contract” is a contract specifically
negotiated for the construction of an asset or a combination of assets that are
closely interrelated or interdependent in terms of their design, technology and
function or their ultimate purpose or use and includes :
(i) contract for the rendering of services which are directly
related to the construction of the asset, for example, those for the services of
project managers and architects;
(ii) contract for destruction or restoration of assets, and the
restoration of the environment following the demolition of assets.
(b) A
“fixed price contract” is a construction contract in
which the contractor agrees to a fixed contract price, or a fixed rate per unit
of output, which may be subject to cost escalation clauses.
(c) A
“cost plus contract” is a construction contract in
which the contractor is reimbursed for allowable or otherwise defined costs,
plus a mark up on these costs or a fixed fee.
(d) “Retentions” are amounts of progress
billings which are not paid until the satisfaction of conditions specified in
the contract for the payment of such amounts or until defects have been
rectified.
(e) “Progress billings” are amounts billed
for work performed on a contract whether or not they have been paid by the
customer.
(f) “Advances” are amounts received by
the contractor before the related work is performed.
2(2) Words and expressions used and not defined in this Tax Accounting
Standard but defined in the Act shall have the meaning respectively assigned to
them in the Act.
3. A construction contract may be negotiated for the construction of a
single asset. A construction contract may also deal with the construction of a
number of assets which are closely interrelated or interdependent in terms of
their design, technology and function or their ultimate purpose or use.
4. Construction contracts are formulated in a number of ways which, for the
purposes of this Tax Accounting Standard, are classified as fixed price
contracts and cost plus contracts. Some construction contracts may contain
characteristics of both a fixed price contract and a cost plus contract, for
example, in the case of a cost plus contract with an agreed maximum price.
Combining and Segmenting Construction Contracts
5. The requirements of this Tax Accounting Standard shall be applied
separately to each construction contract except as provided for in paragraphs 6,
7 and 8 herein. For reflecting the substance of a contract or a group of
contracts, where it is necessary, the Tax Accounting Standard should be applied
to the separately identifiable components of a single contract or to a group of
contracts together.
6. Where a contract covers a number of assets, the construction of each
assetshould be treated as a separate construction contract when:
(a) separate proposals have been submitted
for each asset;
(b) each asset has been subject to separate
negotiation and the contractor and customer have been able to accept or reject
that part of the contract relating to each asset; and
(c) the costs and revenues of each asset can be
identified.
7. A group of contracts, whether with a single customer or with several
customers, should be treated as a single construction contract when:
(a) the group of contracts is negotiated as a
single package;
(b) the contracts are so closely interrelated
that they are, in effect, part of a single project with an overall profit
margin; and
(c) the contracts
are performed concurrently or in a continuous sequence.
8. Where a contract provides for the construction of an additional asset at
the option of the customer or is amended to include the construction of an
additional asset, the construction of the additional asset should be treated as
a separate construction contract when:
(a) the asset differs significantly in
design, technology or function from the asset or assets covered by the original
contract; or
(b) the price of the asset is negotiated
without having regard to the original contract price.
Contract Revenue
9. Contract revenue shall comprise of:
(a) the initial amount of revenue agreed in the
contract, including retentions; and
(b) variations in contract work, claims and
incentive payments:
(i) to the extent that it is probable
that they will result in revenue; and
(ii) they are capable of being reliably
measured.
10. Where contract revenue already recognised as income is subsequently
written off in the books of accounts as uncollectible, the same shall be
recognised as an expense and not as an adjustment of the amount of contract
revenue.
Contract Costs
11. Contract costs shall comprise of
a) costs
that relate directly to the specific contract;
(b) costs that are attributable to contract activity in general and can
be allocated to the contract;
(c) such other costs as are specifically chargeable to the customer
under the terms of the contract; and
(d) allocated borrowing costs in accordance with the Tax Accounting
Standard on Borrowing Costs.
These costs shall be reduced by any incidental income, not being in the
nature of interest, dividends or capital gains, that is not included in contract
revenue.
12. Costs that cannot be attributed to any
contract activity or cannot be allocated to a contract shall be excluded from
the costs of a construction contract.
13. Contract costs include the costs
attributable to a contract for the period from the date of securing the contract
to the final completion of the contract. Costs that are incurred in securing the
contract are also included as part of the contract costs, provided
(a) they can be separately identified; and
(b) it is probable that the contract shall be obtained.
When costs incurred in securing a contract are recognised as an expense in
the period in which they are incurred, they are not included in contract costs
when the contract is obtained in a subsequent period.
14. Contract costs that relate to future activity on the contract are
recognised as an asset. Such costs represent an amount due from the customer and
are classified as contract work in progress.
Recognition of Contract
Revenue and Expenses
15. Contract revenue and contract costs associated with the construction
contract should be recognised as revenue and expenses respectively by reference
to the stage of completion of the contract activity at the reporting date.
16. The recognition of revenue and expenses by reference to the stage of
completion of a contract is referred to as the percentage of completion method.
Under this method, contract revenue is matched with the contract costs incurred
in reaching the stage of completion, resulting in the reporting of revenue,
expenses and profit which can be attributed to the proportion of work
completed.
17. The stage of completion of a contract shall be determined with
reference to:
(a) the proportion that contract costs incurred for work performed
upto the reporting date bear to the estimated total contract costs; or
(b) surveys of work performed; or
(c) completion of a physical proportion of the contract work.
Progress payments and advances received from customers are not determinative
of the stage of completion of a contract.
18. When the stage of completion is determined by reference to the contract
costs incurred upto the reporting date, only those contract costs that reflect
work performed are included in costs incurred upto the reporting date. Contract
costs which are excluded are:
(a) contract costs that relate to future activity on the contract;
and
(b) payments made to subcontractors in advance of work performed under
the subcontract.
19. During the early stages of a contract, where the outcome of the contract
cannot be estimated reliably contract revenue is recognised only to the extent
of costs incurred. The early stage of a contract shall not extend beyond 25 % of
the stage of completion.
Changes in Estimates
20. The percentage of completion method is applied on a cumulative basis in
each accounting period to the current estimates of contract revenue and contract
costs. Where there is change in estimates, the changed estimates shall be used
in determination of the amount of revenue and expenses in the period in which
the change is made and in subsequent periods.
Disclosure
21. A person shall disclose:(a) the amount of contract revenue
recognised as revenue in the period; and
(b) the methods used to determine the stage of completion of
contracts in progress.
22. A person shall disclose the following for contracts in progress at
the reporting date:
(a) Amount of costs incurred and recognized profits (less recognized
losses) upto the reporting date;
(b) the amount of advances received; and
(c) the amount of retentions.
*********
Tax Accounting Standard [TAS]
Tax Accounting For
Government Grants
Preamble
This Tax Accounting Standard is applicable for computation of income
chargeable under the head “Profits and gains of business or profession” or
“Income from other sources” and not for the purpose of maintenance of books of
account.
In case of conflict between the provisions of the Income Tax Act, 1961
(
„the Act
‟) and this Tax Accounting Standard, the
provisions of the Act shall prevail to that extent.
Scope
1. This Tax Accounting Standard deals with the treatment of Government
grants. The Government grants are sometimes called by other names such as
subsidies, cash incentives, duty drawbacks, waiver, concessions, reimbursements,
etc.
2. This Tax Accounting Standard does not deal with:
(a) Government assistance other than in the form of Government
grants;
(b) Government participation in the ownership of the
enterprise.
Definitions
3(1) The following terms are used in the Tax Accounting Standard with the
meanings specified:
(a) “
Government” refers to the Central Government,
State Governments, agencies and similar bodies, whether local, national or
international.
(b) “
Government grants” are assistance by Government
in cash or kind to a person for past or future compliance with certain
conditions. They exclude those forms of Government assistance which cannot have
a value placed upon them and the transactions with Government which cannot be
distinguished from the normal trading transactions of the person.
3(2) Words and expressions used and not defined in this Tax Accounting
Standard but defined in the Act shall have the meaning assigned to them in the
Act.
Recognition of Government grants
4(1) Government grants should not be recognized until there is reasonable
assurance that (i) the person shall comply with the conditions attached to them,
and (ii) the grants shall be received.
4(2) Recognition of Government grant shall not be postponed beyond the date
of actual receipt.
Treatment of Government grants
5. Where the Government grant relates to a depreciable fixed asset or
assets of a person, the grant shall be deducted from the actual cost of the
asset or assets concerned or from the written down value of block of assets to
which concerned asset or assets belonged to.
6. Where the Government grant relates to a non-depreciable asset or assets
of a person requiring fulfillment of certain obligations, the grant shall be
recognized as income over the same period over which the cost of meeting such
obligations is charged to income.
7. Where the Government grant is of such a nature that it cannot be
directly relatable to the asset acquired, so much of the amount which bears to
the total Government grant, the same proportion as such asset bears to all the
assets in respect of or with reference to which the Government grant is so
received, shall be deducted from the actual cost of the asset or shall be
reduced from the written down value of block of assets to which the asset or
assets belonged to.
8. The Government grant that is receivable as compensation for expenses or
losses incurred in a previous financial year or for the purpose of giving
immediate financial support to the person with no further related costs, shall
be recognized as income of the period in which it is receivable.
9. The Government grants other than covered by paragraph 5, 6, 7, and 8
shall be recognized as income over the periods necessary to match them with the
related costs which they are intended to compensate.
10. The Government grants in the form of non-monetary assets, given at a
concessional rate, shall be accounted for on the basis of their acquisition
cost.
Refund of Government Grants
11. The amount refundable in respect of a
Government grant referred to in paragraphs 6, 8 and 9 shall be applied first
against any unamortized deferred credit remaining in respect of the Government
grant. To the extent that the amount refundable exceeds any such deferred
credit, or where no deferred credit exists, the amount shall be charged to
profit and loss statement.
12. The amount refundable in respect of a
Government grant related to a fixed asset or assets shall be recorded by
increasing the actual cost or written down value of block of assets by the
amount refundable. Where the actual cost of the asset is increased, depreciation
on the revised actual cost or written down value shall be provided prospectively
at the prescribed rate.
Disclosure
13. Following disclosures shall be made in
respect of Government grants:
(a) Nature and extent of
Government grants recognised during the previous year by way of deduction from
the actual cost of the asset or assets or from the written down value of block
of assets during the previous year.
(b) Nature and extent of Government grants
recognised during the previous year as income.
(c) Nature and extent of
Government grants not recognised during the previous year by way of deduction
from the actual cost of the asset or assets or from the written down value of
block of assets and reasons thereof.
(d) Nature and extent of Government
grants not recognised during the previous year as income and reasons
thereof.
