The central government issued Income Computation and Disclosure Standards (ICDS) in accordance with the powers bestowed upon it by Section 145(2) of the Income Tax Act, 1961.
An Accounting Standards Committee formed by the Central Board of Direct Taxes in 2012 created a draft of 14 Tax accounting standards. These were later revised, after receiving inputs from various stakeholders, to 12 and were again put forward to the public for suggestions.
The government notified 10 ICDS out of the 12 drafted by the Ministry of Finance in March 2015 and the said ICDS were to be applicable from the financial year of 2016-17. These were framed with the assistance of Generally Accepted Accounting Principles (GAAPs).
The main purpose of the ICDS is to bring uniformity and reduce irregularities in accounting policies that deal with the computation of income for tax purposes and the like. It will be made compulsory to disclose income for which Form 3CD will be amended that related to Tax audit report. Also, in case of a conflict between the ICDS and the Income Tax Act, the latter shall prevail.
The earlier method that was followed was the complete contract method in which accounting for tax and income was done when the need arose. A specified period could be designated after which income had to be shown and it was felt that companies were showing lower rate of profit. To resolve this issue, the Central Board of Indirect Taxes came up with the idea of ICDS.
In this system, profits have to be shown after 25% of the construction work in a construction contract is complete. This is known as the percentage of completion method. It will help in computing the income easily and advance the process of arriving at a conclusion about the profits.
The ICDS are applicable to all except for an individual or a Hindu Undivided Family not falling under the said tax related provisions. It is applicable on computation of chargeable income falling under the category of PGBP or IFOS. It is not meant for the purposes of maintaining account books.
The 10 standards are:
- ICDS I – Accounting policies
- ICDS II – Valuation of inventories
The valuation includes that of the stock and machinery with the method of valuation used and closing balance of the stock to be disclosed.
- ICDS III – Construction contracts
This is used in case of construction works and the method used to identify the stage of completion along with the revenue need to be disclosed.
- ICDS IV – Revenue recognition
It includes revenue earned from sale of goods or services and from using resources giving dividends, royalties, etc. The revenue from the past year along with the method of valuation used has to be disclosed.
- ICDS V – Tangible fixed assets
- ICDS VI – Effects of changes in Foreign Exchange rates
This includes the disclosure of transactions of foreign currency and the financial statements of such transactions as contracts.
- ICDS VII – Government grants
These deals with the grants given by government and all the purposes for which the grant has been given have to be fulfilled to the amount given.
- ICDS VIII – Securities
They are dealt as ‘stock in trade’ and are to be assessed at actual cost on acquisition.
- ICDS IX – Borrowing costs
These costs are those that are needed for the purpose of qualifying asset which is defined under ICDS V.
- ICDS X – Provisions, contingent liabilities and contingent assets
Therefore the main reason for bringing out the ICDS is postponing the expenses and advancing the recognition of income. Recently, the ICDS has come under the legal scanner where its constitutional validity is being challenged that will also increase the taxpayers’ burden. It is has been accused as being violation of Article 265 according to which no tax can be levied or collected except by the authority of law and Article 19 (1)(g) which allows all citizen to practice any occupation or business. The judgment has been reserved for now while the authorities still stress on its benefits and advantages.