Income Computation and Disclosure Standards (ICDS) – A paradigm shift in the compliance and reporting obligations under The Income Tax Act, 1961

Assessment Year 2015-16 is slowly fading away. I hope, with the short extension in due date to 31.10.2015 for tax audit filings, each one of you has been able to meet the deadline for annual tax filings. I also hope that those of you falling under the transfer pricing regulations would be able to make it by 30.11.2015 and are not expecting another extension, for that would be a very tough bargain. The CBDT this year had clearly signaled the industry that it is not going to entertain the due date extension petitions with a very warm heart, despite the delay in issue of ITR forms or any other procedural delay on the part of the authority. Hence I consider it prudent that for the Assessment Year 2016-17, we should be well prepared in advance, especially with the intricate changes introduced by the CBDT vide the recently notified Income Computation and Disclosure Standards (ICDS), effective from the Assessment Year 2016-17.

ICDS are a set of 10 standards (similar to accounting standards), in accordance with which, every taxpayer following the “mercantile system” of accounting and offering taxable income under the heads “Profits and Gains of Business or Profession” and/or “Income from other sources”, is under a mandatory requirement to compute its taxable income and make disclosures. The said ICDS are required to be followed by every class of taxpayer be it an individual, partnership, AOP or a Company, without any monetary limit. Hence whether you fall under the tax audit or not, whether your gross taxable income is 1 lac or 100 crores, you definitely have a compliance to be made under the ICDS.

Since ICDS have been adopted from the Accounting Standards, they carry the same name and broadly the same content with few variations. The 10 notified ICDS with their relative accounting standards are as under:

ICDS No.Name of the ICDSRelated ASKey Differences in ICDS from AS
1Accounting PoliciesAS-1– Recognition of losses on prudence concept – derecognized
– Change in accounting policies not permitted unless “reasonable cause exists”. No definition for the term “reasonable cause”
2InventoriesAS-2– Standard costing method – not accepted
– Valuation rules prescribed for service providers
3Construction ContractsAS-7– Recognizes only percentage of completion method. Hence completed contract method not relevant any more.
– Does not permit recognition of profits in early stages of contract (ie. where percentage of completion is less than 25%)
– Does not permit recognition of expected losses on onerous contracts
– Applicable to all open contracts as at 31.03.2015
4Revenue RecognitionAS-9– Does not contain guidance on recognition of revenue in the case of principal or agent (i.e. gross vs. net)
– All Service providers to recognize revenue on the basis of percentage of completion method.
5Tangible Fixed AssetsAS-10– Tangible assets acquired in exchange of another asset shall be valued at the fair value of the assets so acquired. Fair value of the asset given in exchange has no relevance.
– Prescribes disclosure requirements similar to tax audit report. Hence those not exceeding the 44AB threshold would also be under the mandatory compliance to make part disclosures.
6Effects of changes in Foreign Exchange RatesAS-11– Premium, discount or exchange difference on forward contracts to be recognized at the time of final settlement only.
– Exchange differences on non-integral foreign options to be recognized as income or expense
7Government GrantsAS-12– Capital approach derecognized. Hence all grant monies, either to be reduced from the cost of assets or be treated as income.
8SecuritiesAS-13– Deals with only securities held as stock in trade
– Category wise comparison of cost and NRV
– Unquoted or securities being quoted irregularly to be valued at cost.
9Borrowing CostsAS-16– No minimum period defined for classifying an asset as a qualifying asset. Thus borrowing costs for even those assets which do not take substantial time for construction, may have to be capitalized.
– Exchange differences arising of interest cost not considered as borrowing costs
– New formula for capitalization of general borrowings cost
– Different dates for capitalization of specific and general borrowings
– Capitalization to be continue during the period of suspension and to end only when the asset is put to use.
– Income from temporary deployment of unutilized borrowed funds to be taxed as income and not available for set off against capitalized cost.
10Provisions, Contingent Liabilities and Contingent AssetsAS-29– Provisions to be recognized only if reasonable certainty exists.
– Contingent assets to be recognized when the inflow of economic benefits is reasonable certain.

The objective behind issue of the above ICDS’sis :

  • To lessen the accounting uncertainty due to the flexibility offered by AS;
  • To provide an aligned methodology for computing taxable income when companies converge their financial reporting with IFRS’s; and
  • To reduce litigation due to different stands taken by the Revenue which are not in alignment with the accounting standards.

However the above ICDS come with a standard disclaimer that wherever the provisions of the Act differ with ICDS’s, the Act shall prevail, as ICDS are not an extension of the Act, but only a computation mechanism.

Also the above ICDS are not applicable to MAT provisions. Neither are the taxpayer’s required to maintain their books of accounts in accordance with these ICDS’s. The above standards strictly relate to the computation of taxable income and mandatory disclosures to be made thereto. However, there is no clarity on how and where to make such disclosures. Well we can expect a new form or inclusion of additional schedules in the tax audit report and or Income Tax returns, requiring massive changes in the existing forms and thereby delay in release of forms for the AY 2016-17 as well. 🙂

However there are certain challenges in the adoption of ICDS which needs clarification.

Akin to most of the conflicts that arise, this is also a question of balance and I feel that the weight is certainly tipping towards the pros rather than the cons.

By virtue of applicability of these standards, every entity is mandated to follow them and the Tax Auditors!!! 🙂

My sincere advice would be not to wait until the conclusion of the financial year but to start making an analysis right away as to how the application of these ICDS’s would impact your computation of income and tax liabilities.


Devina Gupta

Anirudh Srinivasan

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