Union Budgets at times include provisions that act as the Government’s response to court decisions that have gone against the regime. The retrospective amendment to tax Vodafone-type transactions is a good example. Union Budget 2018 has amended some provisions in the Income Computation and Disclosure Standards (ICDS) as a response to the decision of the Delhi High Court in the case of Chamber of Income Tax Consultants in which many ICDS provisions were held to be ultra vires (beyond the powers of) the Income Tax Act.
ICDS amendments
The Budget provisions state ICDS would be amended to provide that a mark-to-market loss or other expected loss would be permitted as a deduction from income. Also, any gain or loss arising on account of effects of changes in foreign exchange rates in respect of specified foreign currency transactions shall be treated as income or loss.
A new provision, 43CB in the Act, states that profits arising from a construction contract or a contract for providing services shall be determined on the basis of percentage of completion method except for certain service contracts, and that the contract revenue shall include retention money, and contract cost shall not be reduced by incidental interest, dividend and capital gains.
Valuation of inventory attracts a lot of attention with provisions stating that the valuation of inventory shall be made at lower of actual cost or net realisable value, the valuation of purchase and sale of goods or services and of inventory shall be adjusted to include the amount of any tax, duty, cess or fee actually paid or incurred by the assessee to bring the goods or services to the place of its location and condition as on the date of valuation, inventory being securities not listed, or listed but not quoted, on a recognised stock exchange, shall be valued at actual cost initially recognised, inventory being listed securities, shall be valued at lower of actual cost or net realisable value.
Another new Section 145B provides that interest received by an assessee on compensation or on enhanced compensation, shall be deemed to be the income of the year in which it is received and the claim for escalation of price in a contract or export incentives shall be deemed to be the income of the previous year in which reasonable certainty of its realisation is achieved.
The Budget provisions conclude by stating that recent judicial pronouncements have raised doubts on the legitimacy of the notified ICDS. However, since many taxpayers have already complied with the provisions of ICDS, the amended ICDS provisions would apply retrospectively from April 1, 2017 — the date when ICDS provisions made their arangetram.
Increasing confusion
It is clear that the proposed ICDS amendments in Budget 2018 are a response to the decision of the Delhi High Court in the Chamber of Income Tax Consultants case. Yet again, the department has made amendments on a piece meal basis instead of looking at the ICDS law as a whole.
There still exist many inefficiencies in the ICDS standards- there are too few ICDS standards as compared to accounting standards, the standards are too short when compared to accounting standards and they do not consider significant business transactions such as provision for impairment losses. In a few years from now, all accounting standards are expected to move over to the concept of Fair Value accounting-an area where ICDS still have a lot of work to do.
New accounting standards on Revenue recognition and Lease accounting are radically different from the existing standards. If the tax department continues to issue ICDS standards as reactions, the present alternate expansion given to the abbreviation ICDS would continue —Increasing Confusion, Decreasing Simplicity.
The writer is a chartered accountant