Firms need not keep 2 tax accounts: Finmin panel

A finance ministry panel on Monday proposed the adoption of a separate set of accounting standards under the Income Tax (I-T) Act, but said it would be applicable only to the computation of taxable income. Thus, companies might not have to maintain two sets of accounts under the I-T Act and the Companies Act.

The Accounting Standard Committee of the Central Board of Direct Taxes noted that it would be “burdensome” for the affected tax payers to maintain two sets of books of account. That is, one in accordance with the Accounting Standards issued by the Institute of Chartered Accountants of India (ICAI) and another in accordance with the Accounting Standards notified under the Act.

Accordingly, panel’s interim report in August said the accounting standards notified under the I-T Act should be made applicable only to the computation of taxable income. So, a taxpayer should not be required to maintain books of account on the basis of accounting standards notified under the Act, it added.

The committee noted that the accounting standards issued by the ICAI cannot be notified without modification. These should also eliminate any alternatives to the extent possible, it said, adding that two different sets of accounting standards might cause confusion for taxpayers and other stakeholders. The panel proposed that tax accounting standards (TAS) should be applicable to all tax payers who follow the mercantile system of accounting — and not to those who follow the cash basis of accounting. In case of conflict, the provisions of the I-T Act will prevail over the TAS.

TAS is expected to provide smooth transition to International Financial Reporting Standard. The finance ministry has invited suggestions on the recommendations of the report by November 11.

The Finance Act, 1995, had empowered the government to notify accounting standards for any class of assessees or income.

The provision was introduced as the finance ministry felt there was flexibility in the standards issued by ICAI, which made it possible for an assessee to avoid payment of correct taxes by following a particular system.

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.