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ICDS - Quest for harmony

Source :
Business Standard
Author : Mukesh Butani, Managing Partner, BMR Legal
Dated: Jul 30, 2015

The Central Board of Direct Taxes (CBDT), Department of Revenue, recently operationalised a new framework for computation of income, by notifying Vide Notification No. SO 892(E) dated 31-3-2015 the 'Income Computation and Disclosure Standards' (ICDS) from April 1, 2015.

The standards have been introduced to meet long standing objective for harmonising Accounting Standards (AS) issued by the ICAI (Institute of Chartered Accountants) of India with that of the Income-tax Act, 1961 (Act), for consistency in computation of taxable income. Steps to achieve such harmonisation began in 1995 when by way of a subordinate legislation such powers were conferred on the CBDT under section 145 Under section 145 of the Act, the CG is empowered to notify accounting standards to notify independent accounting standards.

The first two standards relating to 'Disclosure of Accounting Policies' and 'Disclosure of Prior Period and Extraordinary Items and Changes in Accounting Policies' notified by the CBDT (in 1996), left limited impact and hence consecutive committees were constituted to review and recommend modality of harmonising such standards. That said successive verdicts of the Apex Court on a host of disputes concerning income and expenditure recognition, characterisation of expenditure between revenue and capital and computation of book profits for the purpose of Minimum Alternate Tax (MAT) emphasised upon the prominence of AS, as notified by the government in pursuance to ICAI standards.

With the recent notification, the question that arises is, if such uniformity and consistency will reduce tax litigation besides of course consistency and avoiding maintaining separate accounting records for statutory reporting and tax purposes.

Immediate upshot

First, the standards are applicable for all tax payers following only mercantile system of accounting and to income chargeable under the head 'profits and gains of business or profession' and 'income from other sources'. Second, tax computation as per the standards need to be factored for computing advance tax installments for the current financial year 2015-16. For most tax payers who run their accounting on ERP systems, capturing the difference between the Income Tax Act and current AS is crucial. I wonder if the government could have given a year as breathing time for tax payers to adjust their systems or at least make its applicability optional for the first few years.

Is ICDS really a panacea?

While the objective of ICDS is to reduce litigation and achieve harmonisation, it has the potential to raise disputes, particularly, in the present form and it is hoped that the government articulates transition challenges that tax payers are expected to face. There are fundamental changes in the manner of recognising income and expenditure as per ICDS since many concepts, including the concept of accrual (under the Act) as interpreted by courts, seem to be at variance with ICDS.

As a general rule, since ICDS is now an integral part of the Income Tax law, it has the status of a subordinate legislation. In other words, it cannot override other statutory provisions and judicial principles laid down by courts. For instance, general principles laid down by courts say in the context of interpretation of law concerning 'deductibility of expenditure' shall remain unaffected and if that be the case, ICDS will achieve limited objective.

Since ICDS does not overrule the provisions of the Act, the standards which are at variance with the Act will become redundant or it will give rise to interpretational disputes. To me, the underlying philosophy of ICDS appears to be acceleration of recognition of income and deferral of recognition of expenses.

While this may bring uniformity in taxation and bring tax revenues for the Government, what will effectively be achieved is only a timing issue. In select cases, the tax computation as per new standards is likely to result in double taxation, particularly in context of MAT computation.

The requirement of substance over form sounds like a mini GAAR and is likely to lead to disputes on characterisation. The ICDS specifically exempts tax payers from maintenance of separate books of account for tax purposes.

Difficult to fathom though, given the divergence of ICDS with current AS and IFRS (International Financial Reporting Standards) which are in the midst of convergence with Indian AS, it seems tax payers will continue to maintain multiple sets of books. In the absence of a separate set of books, preparation of reconciliation between taxable income and financial books will become a herculean task, ignoring the effort required to explain such reconciliation to field officers at the assessment stage.

Whilst the intent is noble to bring uniformity in computation of income and reduce litigation, it seems that guidance to Revenue officials and timely clarifications by way of FAQs on conflict areas is vital for the success of ICDS.

This is particularly important since the law clearly empowers officers to complete an ex-parte assessment, if tax payers are non-compliant with ICDS.


Column: Clarification raj

Source :
Financial Express
Author : Mukesh Butani, Managing Partner, BMR Legal
Dated: Jul 10, 2015

Economist and author Adam Smith famously observed, “If a society provides a stable and sensible legal framework, the innate genius of human energy and imagination will allow growth to take care of itself.” This apt quote assumes significance in the light of objectives set out by the current administration to make India a global business destination and make doing business in the country easier to attract foreign investment.

Business or industry at large don’t doubt the intent to create “a stable and sensible legal framework”, and in order to achieve its intent, one of the foremost objective is to arrest and remedy the multitude of ambiguities that have proliferated, largely unchecked, over the past decade, in the context of corporate, tax and commercial laws.

Despite a spate of clarifications, the Companies Act, 2013, and the Rules made thereunder, are rife with ambiguities and what can only be understood to be unintended proscriptions, impacting the day-to-day functioning. While some changes have been implemented via administrative clarifications, there is a great deal left to repair possibly by a legislative amendment. A case in point is exceptions to the provisions pertaining to related party transactions, that are in the ‘ordinary course of business’ and transacted on an arms-length basis. There is no authoritative guidance on what transactions qualify as being in the ‘ordinary course of business’, or on an ‘arms-length basis’, resulting in boards being forced to jerry-build their understanding from Standards of Auditing and tax transfer-pricing precedents.

Perhaps the most prominent instance of regulatory ambiguity relates to the interpretation of the term ‘control’ under various corporate and commercial laws. The term, while of crucial importance in a wide variety of transactional contexts, firmly remains behind veils of intended and unintended obfuscation. The Shubkam case was a perplexing instance, where an opportunity to circumscribe certain aspects of the term was left begging. One would have expected the controversy to be put to rest after debate on the Jet-Etihad deal.

Of course, no discussion on intended or unintended obfuscation would be complete without a reference to foreign investment norms. The quality of legislation in this area has created a situation where businesses have repeatedly sought clarifications from regulators on the same set of issues. This is largely since clarifications, when provided, are often caveated in a manner that renders them practically meaningless for application as precedents.

The recent division of labour between RBI and the Centre in the context of exchange controls has been cautiously welcomed by industry, and has been widely perceived as the harbinger of substantial changes in India’s approach to exchange controls. However, the devil lies in the details, and the Centre must ensure precision in transition of authority, the manner in which “debt instruments” is defined, the treatment of hybrid instruments, and the way transitional / sunset clauses are introduced and implemented.

The problem of regulatory ambiguity extends to sector-specific laws as well. Businesses from taxi aggregator services to online pharmacies to payment intermediaries are never certain of the applicability of sectoral laws to their businesses. The situation of foreign direct investment in the e-commerce sector continues to be equally ambiguous with several investors awaiting clarity. Requests for clarifications to regulators and other statutory authorities are the only effective remedy available to businesses, although the benefits of these case-specific clarifications are seldom made available for the benefit of the wider industry group.

India’s journey from licence raj has been a long and an eventful one. However, we must be cautious that it is not replaced with a “clarification raj”. Wide powers of discretion reposed with the regulators, coupled with opacity and ambiguity in legislation, are not conducive to a stable legal framework.


IT’s all happening in India

Source :
Forbes India
Author : Mahesh Jaising, Partner, BMR & Associates LLP
Dated: Jul 09, 2015

The Indian information technology (IT) growth engine, hitherto dominated by software services and business process outsourcing, appears set to be spurred by ‘Next-Gen’ technologies and services. Pundits predict a data centre boom, with cloud services expected to overtake and possibly overwhelm the traditional on-site infrastructure and perpetual software licensing models.

The proliferation of cloud, mobile, online retail and social media usage has also created a potentially insatiable appetite for new security innovations in data encryption and protection. Cyber security threat perception and mitigation is expected to be a priority for the public as well as private sector, including individuals. This, coupled with continuing growth in new technologies and platforms is expected to aid developers of new applications or ‘apps’ to feed an ever growing need for technology products and services.

Big data is touted to be the next ‘big’ thing with the virtual world making serious inroads into our real and physical world. The Indian government’s agenda of ‘smart cities’ appears well timed given an average individual’s home-front is dominated by ‘smart’ gadgets, with a potential threat of smart workers and drones replacing engineers on the work front.

Historically, a favourable and unrestricted foreign investment policy has aided the IT sector’s growth in India. In this backdrop, the Indian government’s initiatives of ‘Make in India’ and ‘Digital India’ appear to be well positioned to tap into these emerging trends to reaffirm India’s position as a global IT major. The focus of Union Budget 2015 and The Foreign Trade Policy 2015-2020 on technology startups and measures to digitise as well as ease business operations in India for cutting out the proverbial red tape should benefit this sector.

While these measures are indeed welcome, there is a certain level of apprehension that India has fallen behind some of the other emerging economies in being a premier investment destination, with some of these measures being too little, too late. Specifically, the non-inclusion of IT/ITeS services under the recently introduced Service Exports from India Scheme (SEIS) incentives has been a huge disappointment. This is being viewed as a message from the government that this sector is not set to receive any further tax incentives/benefits going forward.

The Indian IT services sector is dominated by exporters of software as well as IT-enabled services. Current perception is that the first movers in this sector appear to have somewhat lost their competitive edge with the sunset on income tax holiday coupled with increasing rates of indirect taxes (particularly service tax) and continuing challenges/inordinate delays in recouping refund of taxes paid. This has raised serious concerns on the very viability of the traditional export oriented unit (EOU) including Software Technology Parks (STP) scheme. In this backdrop, benefits from non-extension of the Merchandise Exports from India Scheme (MEIS) and the SEIS scheme to EOUs/STPs has been a further blow to the expectations of the exporting community. With GST on the anvil, there is a sense of hope as well as apprehension on its impact on EOU/STP exports. While it is believed that some of the existing indirect tax exemptions (such as duty exemptions on procurement of capital goods) may get converted into a refund scheme, there is hope that refund of GST will be considerably fast-tracked.

However, the industry’s wish list for a viable alternative scheme for extending tax holiday/corporate tax incentives to encourage investors (especially multinationals engaged in exports) to choose India as a preferred investment destination and to render Indian IT exports competitive in the international arena appears to remain unfulfilled given the overall policy to minimise tax exemptions and broad base the tax base.

In contrast, while the Special Economic Zone (SEZ) scheme continues to be poised well from a tax and regulatory perspective, access to income tax holiday has been somewhat marred by the introduction of minimum alternate tax as well as restrictions on migration of existing business into the zone from an income tax holiday purpose. SEZs however continue to maintain a preferred status from an indirect tax benefits perspective and it is hoped that this continues under GST as well. Service tax exemption alone is currently an attraction for migration of existing businesses as well as housing of new business in a SEZ.

A key challenge for this fast-growing sector has been that the Indian laws have not kept pace with technological and operational advances of the sector. For example, India’s booming online retail and cloud business is sought to be governed by laws framed in the context of tangible and traditional brick and motor businesses. As a result, businesses and tax administrators are often seen grappling with applying archaic laws to a futuristic world. A case in point being the inability of Indian laws to effectively recognise the market place model under ecommerce, including challenges under Indian VAT laws to allow vendors to virtually register goods held on their behalf by the ecommerce service provide without a physical presence in the state.

With the blurring dividing lines between the real and virtual world, there is also a constant debate on the characterisation of technology-driven products as ‘goods’ vis--vis ‘services’. This debate appears set to stay till goods and services are taxed on par under GST. With fiscal powers with regard to the taxation of goods and services presently divided between the Centre and states, overlap as well as dual taxation of electronic supplies as both goods and services continues to plague businesses in India. Examples of this include lack of clarity on the treatment of electronic supply of software, e-books and other electronic downloads, as well as certain types of cloud infrastructure, including cloud offerings as ‘goods’ vis--vis ‘services’. It is perhaps time for India to borrow a leaf from international practices which generally seek to treat electronic supplies as services. This would, however, entail state governments relinquishing their traditional treatment of such supplies to be goods.

In this backdrop of India’s existing laws trying to catch up with new businesses and business models, it is hoped that GST would futuristically address the needs of the information technology sector, recognising these trends and building into the law certain flexibility to address emerging issues and opportunities of this sector.


Make In India: Mobile Manufacturers Face A New Challenge

Source :
Channel Times
Author : Mahesh Jaising, Partner, BMR & Associates LLP
Dated: Jul 06, 2015

Recognizing the huge potential in the IT hardware manufacturing sector, especially on account of burgeoning demand for mobile handsets and tablets, the government provided duty concessions and benefits for manufacturers in the recent Budget 2015.

This move was aimed at reducing India’s reliance on imports of mobiles and tablets, and in consequence providing a competitive edge to the indigenous manufacturers.

The Government reduced the excise duty at the rate of 1 percent and 2 percent for mobile handsets and tablets respectively (as against 12.5 percent of duty), but it didn’t provide the benefit of CENVAT credit for capital goods used in manufacturing the end product.

These initiatives had spurred enthusiasm of various mobile and tablet players, evaluating the possibility of investing huge sums to set up manufacturing facilities in India or engaging with contract manufacturers in India. However, the enthusiasm of the industry seemed to have short-lived on account of the recent rulings of the Supreme Court in the cases of SRF Limited and AIDEK Tourism Services P Ltd.

In these rulings, the Supreme Court has categorically held that the concessional rate of excise duty that is contingent or conditional on non-availing of CENVAT credit (in similarly drafted notifications for other products) shall apply to manufacturers as well as traders.

The industry players who had set out to make substantial investment and expand their manufacturing facilities in India, are now anxious as they can’t avail CENVAT credit.

In these developments, the industry is hopeful that the Government will take up this issue by possibly making amendments/ changes to the SC ruling by explicitly providing the benefit only for manufacturers.

Accordingly, the need of the hour for the Government is to assuage the concern of industry and engage in meaningful interface with the industry to understand how best the issue can be redressed to ensure the success of ‘Make In India’ program.

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