IFRS Convergence : The Taxation Aspect

India Inc. is almost ready with respect to the adoption of IndAS or so called International Financial Reporting Standards (IFRS). Aligning with IFRS norms will help Indian companies raise cheaper capital overseas, besides making overseas listings and setting up subsidiaries and joint ventures abroad much easier.

Even though IFRS-converged accounting standards (Ind AS) were issued in February 2011, the final implementation date is yet to be notified by the authorities as taxation and several other regulatory issues need to be addressed before implementation. These include issues relating to amendments to the Companies Act, impact on calculation of distributable reserves, determination of the approach to be followed by regulated entities such as banks, insurance and power distribution companies, besides the approach for quarterly reporting by listed companies.

The IFRS-converged standards would also require consideration of tax treatment for notional gains and losses included in the IFRS-converged accounts based on fair value accounting. The transition to the IFRS-converged standards will also result in recognition of certain one-time adjustments which will be recorded in the reserves. The tax treatment of such one-time adjustments needs to be considered.The minimum alternate tax (MAT) will be affected once IndAS are implemented as the method of calculating MAT will change. Under IFRS there are many occasions where timing of revenue recognition would not coincide with the invoice date, which is considered as a triggering event for levying indirect taxes.

The regulators need to take a view on whether financial statements prepared in accordance with the IFRS converged standards will be acceptable for both direct and indirect tax purposes, or whether companies will be required to maintain two sets of accounting records.

As an interim solution, the finance ministry has suggested restricting IFRS compliance for consolidated accounts of companies. For computing tax, stand-alone and not consolidated accounts are considered, so by doing so IFRS implementation can happen earlier than being presumed by MCA.

Tax Accounting Standards (TAS)

After the issuance of the Ind AS, the finance ministry recently released a discussion paper on Tax Accounting Standards (TAS) inviting suggestions of stakeholders for considerations, based on recommendations of a committee set up by the Central Board of Direct Taxes. TAS would govern the computation of taxable income. If this recommendation is incorporated into tax laws, a taxpayer would compute taxable income as per TAS irrespective of accounting standards used for maintaining the books of account.

Separate books of accounts will not be required to be maintained under TAS, reducing the compliance burden on businesses. Rather a reconciliation between the income as per the financial statements prepared under the Companies Act (IndAS or IFRS) and income computed as per the TAS would be required.

The discussion paper only partially addresses the issue of impact of transition to Ind AS on taxation by providing that the shift would not have an impact on the amount of tax payable. It does not address the impact of transition to Ind AS on minimum alternate tax, saying that it is part of the terms of reference of the Accounting Standards Committee.

However, since this challenge is not unique to India, the regulators may consider the approach followed by other countries in addressing this situation.

Countries such as the US are actively considering the best way to achieve convergence with IFRS, and it may be useful to track such developments before we finalise our own implementation approach. It would be unfair to implement Ind AS till the above issues are comprehensively addressed. Other countries have dealt with many of these issues and Indian regulators can consider their experience before firming up their approach.