Income Computation and Disclosure Standards (ICDS) were issued under section 145(2) of the Income Tax Act, 1961. The Ministry of Finance published 14 ICDS drafts out of which only 10 were notified by the Indian government on 31st March 2015.
Income Computation and Disclosure Standards were issued by the Indian government to bring conformity in accounting policies governing the computation of income in accordance with income tax related provisions to reduce the irregularities amongst them. These ICDS provisions were developed using Generally Accepted Accounting Principles (GAAPs) with guidance and assistance from the Institute of Chartered Accountants of India. In this article, we will talk about various provisions of ICDS along with its applicability and features.
What is the applicability of ICDS provisions?
Applicability factors of ICDS are given as follows:
- The provisions of ICDS are only applicable to the individuals computing income under the relevant presumptive taxation scheme.
- The standard specified in ICDS apply to revenues that are liable to tax on the gross basis such as royalty, internet, and fees for technical services for non-residents u/s 11A of the Act.
- Provisions of ICDS are generally applicable to all the taxpayers in India irrespective of their quantum of income, except for persons or HUF (Hindu Undivided Family) as they are not covered under the provisions of Tax Audit. Moreover, provisions of ICDS will not be considered for computation of the Minimum Alternate Tax (MAT).
Important Features of Income Computation and Disclosure Standards (ICDS)
Following are some of the salient features of the Government implemented ICDS:
- ICDS is meant for the computation of income
- ICDS provisions don’t have any criterion of turnover or income.
- In the event of conflicts between the provisions of the Act and ICDS, the provisions would always be kept ahead of the latter.
- ICDS does not have judgment as a fundamental assumption except when it is specifically stated so in the respective ICDS.
- The Income Tax Act, 1961 allows the Assessing Officer to conduct an assessment following Section 144 on an event of a failure to assess income according to ICDS.
- Form 3CD has been revised for making disclosures in compliance with the ICDS provisions.
Provisions of ICDS
ICDS 1 is comprehensive of all the standards for accounting policies. In contrast to Accounting Standards (AS), ICDS does not consider the aspects of materiality and prudence in the selection and applicability of accounting policies.
Changes are permitted in accounting policies only on the existence of some solid grounds. In case there is a change in an accounting policy which does not have any material implications for the last year but is expected to have a reasonable impact in the upcoming years, ICDS shall require disclosures of such changes in the previous year in which the change is adopted, as well as in the previous year in which material implications resulted for the first.
It contains provisions about the valuation of the inventories. In accordance with ICDS on the valuation of securities, the allocation of fixed production for the purpose of their inclusion in the conversion cost is based on the capacity of the production facilities.
At the time of dissolution of a partnership firm or association of individual body, the inventory shall be valued at the realizable value, whether the business is discontinued or not.
ICDS does not provide permission for any kind of changes in the method of valuating inventory without having a reasonable ground for the same.
It deals with the construction contracts. It is applicable to determine the net income for a construction contract provided to a contractor. Percentage completion method is utilized for determining the cost revenue of the construction project.
It is connected with the recognition of the revenue. In this case, IDSS deals with the basis for recognition of revenue those results from the sale of royalties, goods, dividend, etc.
In ICDS, revenue is recognized as:
- Revenue from the sale of goods is recognized in case of a reasonable certainty of collection of goods.
- Revenue from providing services is not recognized in accordance with completed contract methods and is only recognized based on the principles laid down mentioned in ICDS 3 on Construction Contract.
- Interest income must be accrued based on the time determined by the outstanding amount and applicable rates. Premium or Discount on debt securities is recognized over the period to maturity.
- Income on royalties would be accrued as per the conditions of the pertinent agreement.
- Dividend income is recognized based on the provisions of the Act.
It is associated with the specific tangible fixed assets such as buildings, land, and machinery, etc. An item is considered as a tangible fixed asset if it is held for the purpose of producing and providing services or goods and not for sale in the normal course of the business.
If various assets are purchased at consolidated prices, the total consideration shall be fairly remitted to various assets.
It is connected with:
• Treatment of the transactions in foreign currencies.
• Treatment of transactions of foreign currency in forwarding exchange contracts.
• Translation of the financial statements of foreign operations.
This provision deals with Government Grants. It contains provisions in accordance with subsidies, reimbursements, duty drawbacks, waiver, cash incentives, and concessions.
ICDS 8 provisions specifically deal with stock-in-trade held securities and are recognized as follows:
- Security on acquisition is acquired at an actual cost of the purchase price and acquisition charges.
- The cost of acquisition is the fair value of the asset or security acquired concerning the exchange of other security or asset.
- In cum-interest securities, the accrued interest is deducted from the actual cost of the securities.
It deals with borrowed costs concepts. According to the provisions of ICDS all the assets are considered as qualifying assets. The Borrowing costs are attributable to the construction, acquisition or production of a qualifying asset. ICDS has specified a formula for the capitalization of borrowing costs. It involves the allocation of the total general borrowing cost aroused in the ratio of the average cost of qualifying assets on the very first day and the last day of the previous year.
It is connected with provisions, liabilities and contingent assets; other than the ones given below:
- Arising out of executory contracts.
- Arising in an insurance business from contracts with policyholders.
- Arising out of the financial instruments, whether the same is carried out or not at a fair value.
- Covered by the other Income Computation and Disclosure Standards.
So, this was all about the provisions and features of Income Computation and Disclosure Standards. Hope you found it helpful. Any queries or questions, feel free to ask us in the comment section given-below.