Income Computation and Disclosure Standards – VI to VIII 10 October 2015 Presented by: Chandresh Bhimani.

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