Post on 18-Jan-2016
Income Computation and Disclosure Standards – VI to VIII10 October 2015
Presented by: Chandresh Bhimani
Discussion Points
• General principles
• ICDS VI – The Effects Of Changes In Foreign Exchange Rates
• ICDS VII – Government Grants
• ICDS VIII - Securities
Slide 2
General principles
Slide 3
General Principles
• Applicable to all taxpayers following mercantile method of accounting
- For income under the head Business & Profession and income from other sources
• MAT continues to be governed by books of accounts prepared as per AS
• Provision of Income-tax Act, 1961 prevails over ICDS
Slide 4
Situation Key Aspects / Instances
Where there is a specific Section in the Act
Section 43A, 40(a)(ia), 44BB etc.
Where the Act is silent
Based on the Principles under the Act
• Capital vs. revenue S. 2(24), accrual (S. 4, 5), etc
ICDS VI – The Effects Of Changes In Foreign Exchange Rates
Slide 5
ICDS VI – Effects of Changes in Forex Rates
Overview:
Sr No
Relevant Parts Key Aspects
1 Transactions in foreign exchange
• Monetary items (Cash, trade receivables, payables, loans)
• Non-monetary items (Fixed Assets, Investments, Inventory)
Can be on Revenue or Capital Account
2 Foreign operations
• Integral foreign operations (Eg: Liaison office, warehouse)
• Non-integral foreign operations (Eg: Independent Branch)
3 Forward exchange contracts
A. For Hedging purposes
• Forward contract, Currency options
B. For Trading, Speculation purposes
• Forward contract, Currency options
C. Other Forex Derivatives
• Currency futures, Currency swaps, Interest-rate swaps, etc.
Slide 6
1(a) – Forex Fluctuations on Monetary ItemsForex
differences - Monetary
Items
On Revenue Account
On CapitalAccount
Eg: Trade receivables, payables, bank balances,
etc.
Gain / Loss allowed on MTM basis under AS-11 as
well as under the Act
Same tax treatment under ICDS
Eg: Forex loans, etc.
Related to imported asset
Other cases (Local Assets)
Under AS-11• Gain/Loss recognized in
P&L; • Option to capitalize in cost
of asset or accumulated in FCMITD A/c
Under the Act• Adjusted in actual cost [S.
43A]
Same tax treatment under ICDS
Under AS-11• Same as in case of
imported assetsUnder the Act• S. 43A not applicable• Gain / loss – Capital in
nature* (not offered to tax)
Gain / Loss to be recognized in P&L as per ICDS
Eg. Loan to overseas WOS
Slide 7
1(b) – Forex Fluctuations on Non-Monetary Items
NaturePosition
under AS-11
Position under ICDS
Impact in ICDS
Non-monetary items carried at historical cost (eg. Fixed Assets, Long-term Invt)
Date of transaction
Date of transaction No change
Non-monetary items carried at fair value, etc. (eg. Inventory)
Closing rate Date of transaction
Forex diff. as per books to be adjusted while computing taxable income
Forex differences upon conversion on last day of Previous Year:
Example:
Particulars Amount (USD) Exchange Rate Value (INR)
Cost 1,000 1 USD = Rs. 55 55,000
NRV 800 Closing rate - Rs. 60
48,000
Valuation (Lower of USD 1,000 or USD 800) = USD 800
As per AS-11 (USD 800 x Rs. 60) 48,000
As per ICDS (USD 800 x Rs. 55) 44,000Slide 8
Part 2 – Foreign Operations
Foreign Operations
Non-integralIntegral
Eg: Independent foreign branch
Eg: Liaison office, warehouse
ICDS provides that assets / liabilities to be translated as
if they are own assets / liabilities
(Similar to AS-11)
ICDS treatment same as discussed for forex
transactions
No distinction between revenue and capital account
• Assets / Liabilities – Closing Rate
• Income / Exp. – Date of transaction
• Forex Diff – Recognised in P&L as per ICDS(AS-11 – Trf. to FCTR A/c)
1. Significant impact on IT Cos., Indian banks
2. No distinction between revenue and capital account
3. 43A applicable
4. MTM recognized even on Fixed AssetsSlide 9
Part 3 – Foreign Exchange Derivative Transactions Forex
Derivatives
Revenue Account
Capital Account
As per ICDS
• Gain / Loss on Ex. Diff. allowed on MTM basis
• Premium / Discount – To be amortised over contract life
(Same as AS-11)
Forward contracts, Currency options
Hedging for underlying
transactions
Trading, Speculation, Firm commitment, Highly probable
forecast
Bank of Bahrain & Kuwait (41 SOT 290) (SB) supported
MTM basis relying on Woodward Governor
Hedging purpose
As per ICDS
• Gain / Loss on Ex. Diff. allowed on MTM basis
• Premium / Discount – To be amortised over contract life
(Same as AS-11)
As per ICDS
• Gain / Loss on Ex. Diff. allowed at the time of settlement
• Premium / Discount – allowed at the time of settlement
(AS-11 – Gain/loss on MTM basis)
ICDS treatment conflicts CBDT Instruction No. 3/2010 (to the extent of MTM Loss)
No distinction between capital and revenue account
in ICDSSlide 10
Part 3 – Other Forex Derivatives
• Other Forex derivatives like Currency futures, Currency swaps, Interest-rate swaps, etc.
• CBDT Committee recommended for separate ICDS for Financial Instruments
• If not covered under ICDS VI, then ICDS I relating to Accounting Policies may apply
- MTM loss not to be recognized unless such loss recognized in accordance with other ICDS
- MTM loss – not allowed; Treatment of MTM gain in such cases?
Slide 11
ICDS VII – Government Grants
Slide 12
ICDS VII – Government Grants...
Key Aspects:
• ICDS provides Government Grants not to be recognised until there is reasonable assurance that
- Person shall comply with the conditions attached to them; and
- Grants shall be received [Para 4(1)]
• Recognition not to be postponed beyond date of actual receipt [Para 4(2)]
• Govt. grant to be recognized on receipt basis irrespective of conditions fulfilled?
Recent Amendment
• Amendment in S. 2(24) – Finance Act 2015
- Subsidy, grant, etc. (other than reduced from actual cost) to be treated as income – LPG Subsidy?
- Relevance of “Purpose” test ignored
- Favourable judicial decisions overruled [Ponni Sugars (306 ITR 392)(SC), Sahney Steels (228 ITR 253)(SC), Reliance Industries (339 ITR 632)(Bom.)]Slide 13
…ICDS VII – Government Grants…
Recognition under different situations:
Sr No Nature of Grant Position under ICDS
1 For depreciable asset • Reduced from actual cost / WDV
2 For non-depreciable asset (subject to fulfilment of obligations)
• Recognised as deferred income
3 Non-monetary asset at concessional rate
• Not as income
• Asset to be recorded at acquisition cost
4 Other Grants (residuary clause) • Recognised as income
5 For non-depreciable asset (with no obligations)
• Credited to Capital Reserve (AS-12)
• ICDS silent; Recognised as income under residuary clause?
Grants in nature of promoters’ contribution
Slide 14
…ICDS VII – Government Grants.. Disclosures
Disclosures
Slide 15
Nature and extent of Government grants not recognised during FY as income and reasons thereof
Nature and extent of Government grants not recognised during FY by way of deduction from actual cost of asset or assets or from WDV of block of assets and reasons thereof
Nature and extent of Government grants recognised during FY as income
Nature and extent of Government grants recognised during FY by way of deduction from actual cost of asset or assets or from WDV of block of assets during the FY
ICDS VIII – Securities
Slide 16
ICDS VIII – Securities...Key Differences vis-à-vis ICAI AS-13:
Relevant Aspect Position under ICAI AS-13
Position under ICDS
Applicability Covers long-term, current investments but excludes securities held as stock-in-trade
Deals only with securities held as stock-in-trade (shares, debt securities, convertible securities and any other securities not covered above)
Approach for year-end valuation
Individual security wise Portfolio approach
Year-end valuation of unlisted securities
Cost or NRV, whichever is lower
Actual cost
Determination of cost where specific identification not possible
Weighted Average method FIFO MethodNot applicable to securities held by MFs, VCF, Banks, Public
Financial Institutions, FIIs; However, applies to stock brokers, NBFCs, traders
Slide 17
…ICDS VIII – Securities...
Key Issues:
• Portfolio approach vis-à-vis individual security wise valuation
- Taxation of notional profits
- Double taxation of same income when the security is sold (assuming MAT)
• Implication of section 145A?
Individual Security Cost NRV Valuation
Company A 100 20 20
Company B 100 30 30
Company C 100 40 40
Company D 100 300 100
Valuation (ICAI AS-13) 190
Valuation (under ICDS) 400 390 390
Slide 18
…ICDS VIII – Securities...
Particulars Rs. Particulars Rs.
Opening stock 200
Closing stock as per ICDS
390
Notional Income 190
Total 390 Total 390
Illustration…
AY 2016-17 – Tax payable under normal provisions
•Tax on notional profit of 190
…ICDS VIII – Securities...
Particulars Rs. Particulars Rs.
Opening stock as per books of accounts
190
Sale 450
Income 260
Total 450 Total 450
…Illustration
AY 2016-17 – Tax payable under MAT
•Mat payable on book profit of 260
•Double taxation on notional income of 190
•No set-off for tax paid on notional income
…ICDS VIII – Securities
• Actual cost – comprises of purchase price and acquisition charges such as brokerage, fees, tax, duty or cess
- STT also included in actual cost (section
• Pre-acquisition period interest
- ICDS allows interest for pre-acquisition period to be reduced from actual cost
- ICDS treatment in line with prevalent industry practice
• Unlisted securities and thinly traded securities to be valued at cost only regardless of NRV
- Difficulty where securities are delisted or become thinly traded during a particular year.
- Opening stock of such securities may be valued at NRV (being lower than cost) whereas closing stock may be valued at cost resulting in artificial income
Slide 21
Major impact areas
Slide 22
Preponement of income and deferral of expenses
Capital receipts being called ‘income’ (e.g. Forex fluctuation) - Conflict with settled judicial principles
‘Real income’ theory whether overridden? (e.g. Retention money, Contingent assets, Bucket approach)
Mismatch with MAT due to timing differences between books and tax
Forex derivative loss only on actual settlement basis (except F&O contracts for hedging purposes)
Questions?
Thank You