Introduction to Income Computation and Disclosure Standards (ICDS)

Purpose of the article: -The purpose of the article is to give introduction of ICDS and important points for Corporates regarding ICDS 7 which covers impact of Disclosures Standards of Foreign Exchange in the books of Corporates.

Income Computation and Disclosure Standards notified for computation of taxable income
On 31 March 2015, the Central Board of Direct Taxes (“CBDT”) notified the Income Computation and DisclosureStandards (“ICDSs”) which will come into effect from 1 April 2015 and shall accordingly apply for assessment year 2016-17 onwards.

Highlights on notified ICDSs

ICDSs have been notified by the Government as per powers granted under section 145(2) of the Income-tax Act, 1961(“Act”). The notified ICDSs shall supersede the existing accounting standards notified by the CBDT on 25 January 1996(‘existing tax AS') relating to disclosure of accounting policies and disclosure of prior period and extraordinary items andchanges in accounting policies.

ICDSs apply to all taxpayers following accrual system of accounting for the purpose of computation of income under the heads of ‘Profits and gains of business / profession’ and ‘Income from other sources’. Further, the method of accounting prescribed in ICDSs is mandatory – else, as per section 145(3) of the Act, income can be recomputed by tax officer.

It has been specifically stated in the Preamble to all the ICDSs that they are only for income computation and not for maintenance of books of account. The Preamble also mentions that in case of conflict between the provisions of the Act andICDS, the Act shall prevail to that extend.

ICDS provides standards in various areas for computation of taxable income. In case of conflicts between the provisions ofthe Act and ICDS, Act would prevail. However, in case the Act is silent or ambiguous, the interplay between ICDS and existing jurisprudence needs to be evaluated. Also, while ICDS applies to prospective income computation for tax purposes, it is not clear whether ICDS impacts even existing litigation.

Important Points of ICDS 7(Foreign Exchange Implication in Corporate Books):-

1. There is no scope exception for exchange differences arising from foreign currency borrowings which may be regarded as an adjustment to interest costs.

2. “Foreign currency” is a currency other than the reporting currency. “Reporting currency” means Indian currency except for foreign operations where it shall mean currency of the country where the operations are carried out.

3. Foreign operation is a branch, by whatever name called, the activities of which are based or conducted in a country other than India.

4. Non-monetary foreign currency items shall be converted into reporting currency by using the exchange rate at the date of the transaction.

5. Exchange differences arising shall not be recognised as income or expense in that year.

6. Monetary items shall be converted into reporting currency by applying the closing rate.

7. In case of an integral foreign operation, the financial statements shall be translated using the principles and procedures as if the transactions of the foreign operation had been those of the entity itself.

8. For non-integral foreign operations, closing rate method should be followed (i.e. all assets and liabilities are to be translated at closing rate while income and expense items are translated at actual rates). All resulting exchange differences shall be   recognised as income or as expenses in that year.

Attention to Chartered Accountants: -Chartered Accountants are advised to look at Indian GaaP, IND-AS, US GaaP and IFRS before applying ICDS in the books.