The CBDT is mounted with a herculean task of resolving the conflicts in tax law vis-à-vis the new born Ind AS which is set to hit the Indian economy with a flurry of technical standards. Challenges inherent in Ind AS is on par with the Global IFRS and which the adopting countries are already or will be facing in future. But in a country like India where the statutory compliances are two pronged at the minimal– one for company law purpose and the other for tax purposes, problems will be ever pervasive.
For the second time the deadline for tax synchronisation was not met by the CBDT and postponed to November this year. This can be anticipated given the fact that while the creators of Ind AS had precedence in the form of IFRS (issued by IASB) the taxman doesn’t have one. Therefore it does not make things so easy for him to accomplish in the short term.
The following is an attempt to visualise some potential conflicts/issues with tax law which could ‘sandwich’ the corporate world.
Ind AS is bound to revolutionise the way an asset will get accounted in future. In a sense it infuses some novel concepts into our accounting system. As per Ind AS-16 which is all about an Owner occupied property (that will get used for production or administrative purpose going by its definition) one of the elements of ‘cost’ of an asset is an initial estimate of dismantling obligations. Will this portion be included in the ‘actual cost’ of the asset for the purpose of calculating depreciation as per Income tax act? Currently the taxman directs us to learn the term ‘actual cost’ from Taxman’s Direct Taxes Manual, Vol. 3 which presents a host of referential case laws. One of them is the Supreme Court decision in Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 which precisely refers to the normal accountancy rules as the basis of actual cost derivation. Apparently the rule prevalent then was to include all costs to bring the asset to the original condition in addition to the purchase price. Even this has been very specifically spelled out in the decision. The position remains unchanged in DTC where the actual cost of an asset has been defined to mean the cost of the asset to tax payer plus interest cost capitalized minus refundable duties and subsidies. With the new rule laid out as above in the Ind AS-16 it will not be clear whether to include these future dismantling costs for tax base unless the relevant clarifications are issued.
As per Ind AS-8, any material error discovered in the current year will require restatement of the relevant figures in the earliest prior period that is presented for comparison by adjustment of the opening retained earnings or the assets and liabilities as applicable. The issue is how the taxman will view this scenario. Will he commence reassessment of an earlier year if say an item of revenue was underestimated either inadvertently or due to fraud, or is he going to deal it in the current assessment year? If the answer is reassessment, it is will certainly pose a night mare to those who want to make amendments. It also makes life difficult for the tax administrator to constantly keep track of each change to the corporate financials.
Take the case of an interest free loan from employer to the employee. As per Ind AS-39 loans and receivables are to be accounted using effective interest rate on amortised cost basis. This leads to a situation where the employer will get disallowed on the interest charge applying the effective interest method since the same is only imputed and not actual whereas the employee will get the same interest taxed as perquisite perhaps for a different amount. But this is a potential double taxation.
Ind AS-21 introduces the concept of Functional currency which could create a situation where a company in India may have to use a different currency other than Indian Rupee as Functional currency. Our honourable Supreme Court had earlier ruled that a company may keep its accounts in foreign currency but depreciation will have to be calculated in Indian currency at the point of time of acquisition of the asset - CESC Ltd. v. CIT [1998] 233 ITR 50. If the ITO chooses to enforce this mandate the situation would look like half back to square one and such companies will have to operate on a different set of calculations and accounts for the sole aspect of depreciation which is also not feasible from the standpoint of cost-benefit analysis.
In fact the Ind AS-DTC duo does offer an advantageous tax position. Consider the case of a Parent company which transfers away a financial asset (also called as Investment asset) to its 100% subsidiary company in India which continues to hold it as an Investment asset. Under the DTC this is not a transfer event for the purpose of capital gains taxation in the hands of the parent company which means that in the eyes of taxman the legal owner is still the parent company implying that the income from such asset will also continue to be taxed in the hands of the parent. The actual capital gains taxation stands shifted to the point of conversion to a business trading asset by the transferee. But on the contrary if the same transaction qualifies as a transfer under the Ind AS-39, the subsidiary can recognise the asset and also account the income free of tax. This could be a favourable thing for upbringing subsidiaries in their formative stage when the parent can bear the burden.
Most popular issue is that assets will have to be recorded at cash price equivalent (Fair value) amount which is after segregating the imputed interest component on account of deferred credit term. Assuming that the ITO generously accepts the asset cost measurement by the assessee; will he allow deduction for interest debits as mentioned above going by a contrasting legal form and content?
Also with the Ind AS, it seems the collection of items that will get into deferred tax calculations is going to bulge more. More the deferrals, more the complication. To cite one such addition, under Ind AS-21 when an entity opts to accumulate the unrealised foreign exchange differences on Long term monetary assets as a separate component of equity and write it off to P&L over the period of the maturity, such unrealised differences will be tax deductible only in the year of settlement. Ind AS 37 requires provisioning for constructive obligations for e.g. warranty. Such provisions are possible unascertained liabilities as far as tax law is concerned be it for normal business profit taxation or MAT calculation and hence we might see disallowance year after year until actually settled with customer. This might as well be a pain point.
On deep diving anybody is sure to unearth more and more conflicts between accounting and tax law. It remains to be seen whether CBDT will ably bridge all such gaps in the coming days for the Government to set the ball rolling.
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