Proposed TAS will be cumbersome for companies, say experts

New tax standards will increase the burden of tax on the companies, at least for initial years

Tax experts believe that tax accounting standards (TAS), recommended by a Finance Ministry-appointed panel, will increase the burden of tax on the companies, at least for initial years.

Even as the panel, appointed by the Central Board of Direct Taxes (CBDT), mooted that the assessees need not keep two books of accounts-- one for accounting standards and another for proposed TAS -- analysts say that complying with new standards will be a cumbersome process for the companies, particularly smaller ones.

"While the stated objectives of the Committee are to provide more certainty and less chances of litigation, the TAS are likely to increase the tax burden on tax payers ( at least in the initial years)  due to a shift away from the concept of  prudent or conservative outlook in accounting," Neeru Ahuja, partner in Deloitte, Haskins & Sells,  told Business Standard.

Explaining, she said on the one hand, the panel seeks to pre-pone the income side items, on the other it seeks to post-pone or not allow expenses – as compared to traditional accounting standards currently used.

In its final report, the panel recommended that notional losses will not be allowed to be deducted from income for the tax purposes, a norm which is different from accounting standards.

Accounting standard (AS 1) allows recognition of expected losses. However, the same standard does not recognise anticipated profits.

Now the CBDT committee said that since accounting standard amounts to differential treatment for recognition of income and losses, the tax accounting norms will not recognise expected losses or mark-to-market losses.

The same rule will apply for forward exchange or similar contracts entered into for trading or speculation purposes. Accounting standard (AS-11) says that these contracts be mark-to-market at each balance sheet date and the resultant exchange differences should be recorded in profit or loss.

Since such mark-to-market gains or losses are unrealised in nature, the CBDT committee recommended that tax accounting standards should recognise all gains or losses on such contracts only on settlement.

Analysts said revenues are sought to be pre-poned in case of inventories.

Currently, accounting standard does not allow for any valuation of inventories for service provider. However, the CBDT panel recommended that the method of valuation of inventories of a service provider based on the international best practices be incorporated in the TAS.

"In the Indian Economy, service sector plays a vital role and the Committee is of the view that to give certainty to the taxpayers in respect of computation of income, a method of valuation of inventories should be provided for," the panel said to explain its recommendations.

According to recommendations, TAS will also deal with securities held as stock-in-trade for tax purposes, which is not  recognized by accounting standard (AS-13).

Securities held as stock-in-trade draws higher tax at the rate of 30 per cent, against 15 per cent long term capital gains tax on listed securities held as investment. This is the current practice as well, but TAS has recognized this to give greater clarity, an analyst explained.

While the committee recommended that tax assessees need not maintain two books of accounts, analysts say there will be a number of tax adjustments and workings which will need to be carried out by taxpayers to comply with new TAS.

"For example, inventory valuation for tax maybe completely different and have to be re-done, similarly workings for foreign exchange gains and losses and many more. These will also need to be audited by the tax auditor before returns are filed," Ahuja explained.

She said overall the new TAS will create more complexity for tax payers – specially smaller tax payers. "They (tax payers) will need to understand the impact and comply with two sets of accounting standards- those under Income Tax Act and the ones under  Companies Act, formulated by the Institute of Chartered Accountants (ICAI),“ she added.

The panel, headed by H Srinivasalu who is a Income Tax commissioner in Hyderabad, recently released its final report containing recommendations and proposals with respect to TAS. The Committee has proposed that at least 14 TAS be notified which will be different from the currently used accounting standards issued by the ICAI.