SKP Tax Alert
Volume 9 Issue 18 |
Government announces revised text of ICDS

The government recently announced a revised text of the Income Computation and Disclosure Standards (ICDS), which are applicable from 1 April 2016.

Given the contradictions between the ICDS and accounting requirements and the challenges in ICDS implementation, certain representations were made to the government to amend cumbersome requirements of ICDS, and if not possible to amend, at least defer the same. Based on these representations, the government initially deferred the applicability of ICDS by one year from 
financial year (FY) 2015-16 to FY 2016-17, and has now announced the revised ICDS.

The notable highlights and the principal differences (compared to earlier ICDS) are given below:
  • Individuals and Hindu Undivided Family (HUF) taxpayers will not be subject to a tax audit have been exempted from complying with the ICDS requirements. ICDS continue to apply to companies, limited liability  partnerships and partnership firms, irrespective of their turnover;
  • The Standard Costing method is now permitted for inventory valuation;
  • Revenue recognition of construction contracts and service contracts continues to be as per the Percentage of Completion Method. However, the following relaxations have been made:
    • Revenue from contracts existing as on 31 March 2016 can be recognised as per the existing revenue recognition policy of the taxpayer; 
    • When the duration of the contract is up to 90 days, revenue can be recognised as per the Completed Contract Method; and
    • When a service contract involves an indefinite number of activities over a specified period of time, the revenue can be recognised on a straight-line basis over the contract duration.
  • Interest income on any tax, duty or cess shall be taxable only on a receipt basis;
  • Borrowing costs relating to borrowings made for general purposes are required to be capitalised over the cost of the assets only if the assets necessarily take 12 months or more to be ready for their intended use;
  • All foreign branches of an Indian entity will be regarded as Integral Foreign Operations. The financial statements of such branches drawn up in foreign currency must be converted to Indian currency; and
  • For securities held by Scheduled Banks and Public Financial Institutions, the classification, recognition and measurement requirements shall be as per the guidelines issued by the Reserve Bank of India.
The format of Form 3CD (annexure to the Tax Audit Report) has also been amended and ICDS-related disclosures will now have to be made in the Tax Audit Report as well.
SKP's comments
The changes carried out to the ICDS regime are appreciated and would assist in easing the compliance burden to a certain extent. However, the changes made are restricted to select cases while other cumbersome areas for the implementation of ICDS still remain. These areas include the absence of the concept of Prudence and Materiality, the Percentage Completion method for recognising revenue from service contracts, the ‘reasonable certainty’ criteria for recognising provisions of expenses, the bucket approach for the valuation of securities, etc.

Business enterprises will have to consider the effect of ICDS for the calculation of advance tax for the third quarter which is due on 15 December 2016. If there is a shortfall in the payment of advance tax for the first and second quarter on account of ICDS, the taxpayer would be exposed to interest liability though the text of the revised ICDS. The government may make the necessary legislative changes to provide relief from interest liability in such cases.

Currently, a further extension of ICDS is not likely. Business enterprises should gear up for ICDS impact analyses and its implementation.
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