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Total Number of Subscribers: 1626 |
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Date:16th August 2010 |
Compiled by: M Sathya Kumar |
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As corporate India comes to terms with the complex new
system of accounting standards, which it will have to adopt beginning April
1, it is vexed with two related issues that it has no control over — taxation
and the companies law. As it is, the kaleidoscope of conflicting perspectives
is complex enough to confound even the knowledgeable. For example, when you
depreciate different components of an asset over varying useful lives and at
different rates as mandated by the International Financial Reporting Standards
(IFRS), as opposed to applying a single rate for the entire asset as is done
today, will the depreciation load rise or decline? You have freehold land and
haven't decided if it is for real estate development or your own office
building — is the land, then, an asset or an investment? If preference
capital is to be treated as a loan, then is the dividend actually ‘interest'? Questions, hundreds of them, answers to which is more a
matter of opinion than an established principle, are buzzing around the Indian
accounting profession. Yet, these appear mere pinpricks when you compared with
the problems thrown up by aspects of taxation policy and the companies law. Uncertainties At a seminar on IFRS organised here by the Confederation
of Indian Industry, experts rued that the authorities were yet to come out
with a fundamental guideline as to whether from April 1 next year, the
taxable profits will be computed according to existing Indian accounting
standards or IFRS. A committee has been formed comprising members from the
Central Board of Direct Taxes and the Institute of Chartered Accountants of
India. The committee will presumably first look into revenue implications for
the Government rather than extend help to the corporate sector. Beyond that nobody knows how the taxation regime will
pan out I the IFRS era. The predominant view is that since only about a
thousand companies will mandatorily migrate to IFRS on April 1 (see table),
the Government will continue with the Indian GAAP (Generally Accepted
Accounting Principles) for computing taxable profits. If it is to be Indian standards for tax computation and
IFRS for compliance with corporate legislation, it will be tough on
accountants who will have to keep two separate books of accounts. Yet, experts point out, it is not as simple as that. The
Income-Tax Department being no spring chicken, the principal alarm in the
corporate world is that the taxman will choose what suits him best, from
Indian standards and IFRS, and you will end up with the worst of both worlds.
A senior finance professional puts this succinctly: “What is not ‘income'
today will become ‘income', what is ‘expenditure' will not be treated as
expenditure.” For instance, under IFRS, preference capital is treated
as a loan and you will charge preference dividend to Profit and Loss account,
but the I-T Department will not let you call it ‘expenditure'. If you ‘fair value' an asset (as opposed to the
conservative ‘cost method') and sell it, what will be the basis for calculating
capital gains? If you fair value your property, will the local
municipal authorities not ask you to pay property tax on the basis of “your
own valuation”? Unless the haze of taxation clears first, there is bound
to be chaos in the marketplace. Balance sheets Equally, the lack of alignment between the Companies law
and IFRS has left the accountants nonplussed. The familiar Schedule VI in which we are all used to
reading the balance sheets will be (or ought to be) a relic in a few years
because the format of presentation of the balance sheet under IFRS would be
in according to a different prescription. But the Companies Act will need to be amended to make
way for a smarter presentation of financial statements than Schedule VI. Leave aside the disconcerting fact that an overhaul of
the Companies Act has been pending for nearly a decade and several avatars of
the Companies Bill have come, and gone. The current Bill does not seem to be in alignment with
IFRS. Schedule VI is one example, but there are other issues, such as the
classification of current and non-current assets. Amid all this confusion, there seems to be one hope in
the corporate world: That like the Companies Bill, the Direct Taxes Code, and
a whole lot of other things, IFRS implementation will also get put off to a
later date. Article was earlier published in one of the reputed financial daily. |
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