1. Income Computation and Disclosure Standards – VI to VIII 10 October 2015 Presented by: Chandresh Bhimani

2. Discussion Points General principles ICDS VI – The Effects Of Changes In Foreign Exchange Rates ICDS VII – Government Grants ICDS VIII - Securities Slide 2

3. General principles Slide 3

4. General Principles Applicable to all taxpayers following mercantile method of accounting -For income under the head Business & Profession and income from other sources MAT continues to be governed by books of accounts prepared as per AS Provision of Income-tax Act, 1961 prevails over ICDS Slide 4 SituationKey Aspects / Instances Where there is a specific Section in the Act Section 43A, 40(a)(ia), 44BB etc. Where the Act is silentBased on the Principles under the Act Capital vs. revenue S. 2(24), accrual (S. 4, 5), etc

5. ICDS VI – The Effects Of Changes In Foreign Exchange Rates Slide 5

6. ICDS VI – Effects of Changes in Forex Rates Overview: Sr No Relevant PartsKey Aspects 1Transactions in foreign exchange Monetary items (Cash, trade receivables, payables, loans) Non-monetary items (Fixed Assets, Investments, Inventory) Can be on Revenue or Capital Account 2Foreign operations Integral foreign operations (Eg: Liaison office, warehouse) Non-integral foreign operations (Eg: Independent Branch) 3Forward exchange contracts A. For Hedging purposes Forward contract, Currency options B. For Trading, Speculation purposes Forward contract, Currency options C. Other Forex Derivatives Currency futures, Currency swaps, Interest-rate swaps, etc. Slide 6

7. 1(a) – Forex Fluctuations on Monetary Items Forex differences - Monetary Items On Revenue Account On Capital Account Eg: Trade receivables, payables, bank balances, etc. Gain / Loss allowed on MTM basis under AS-11 as well as under the Act Same tax treatment under ICDS Eg: Forex loans, etc. Related to imported asset Other cases (Local Assets) Under AS-11 Gain/Loss recognized in P&L; Option to capitalize in cost of asset or accumulated in FCMITD A/c Under the Act Adjusted in actual cost [S. 43A] Same tax treatment under ICDS Under AS-11 Same as in case of imported assets Under the Act S. 43A not applicable Gain / loss – Capital in nature* (not offered to tax) Gain / Loss to be recognized in P&L as per ICDS Eg. Loan to overseas WOS Slide 7

8. 1(b) – Forex Fluctuations on Non-Monetary Items Nature Position under AS-11 Position under ICDS Impact in ICDS Non-monetary items carried at historical cost (eg. Fixed Assets, Long-term Invt) Date of transaction No change Non-monetary items carried at fair value, etc. (eg. Inventory) Closing rate Date of transaction Forex diff. as per books to be adjusted while computing taxable income Forex differences upon conversion on last day of Previous Year: Example: ParticularsAmount (USD)Exchange RateValue (INR) Cost1,0001 USD = Rs. 5555,000 NRV800Closing rate - Rs. 6048,000 Valuation (Lower of USD 1,000 or USD 800) = USD 800 As per AS-11 (USD 800 x Rs. 60)48,000 As per ICDS (USD 800 x Rs. 55)44,000 Slide 8

9. Part 2 – Foreign Operations Foreign Operations Non-integralIntegral Eg: Independent foreign branch Eg: Liaison office, warehouse ICDS provides that assets / liabilities to be translated as if they are own assets / liabilities (Similar to AS-11) ICDS treatment same as discussed for forex transactions No distinction between revenue and capital account Assets / Liabilities – Closing Rate Income / Exp. – Date of transaction Forex Diff – Recognised in P&L as per ICDS (AS-11 – Trf. to FCTR A/c) 1.Significant impact on IT Cos., Indian banks 2.No distinction between revenue and capital account 3.43A applicable 4.MTM recognized even on Fixed Assets Slide 9

10. Part 3 – Foreign Exchange Derivative Transactions Forex Derivatives Revenue Account Capital Account As per ICDS Gain / Loss on Ex. Diff. allowed on MTM basis Premium / Discount – To be amortised over contract life (Same as AS-11) Forward contracts, Currency options Hedging for underlying transactions Trading, Speculation, Firm commitment, Highly probable forecast Bank of Bahrain & Kuwait (41 SOT 290) (SB) supported MTM basis relying on Woodward Governor Hedging purpose As per ICDS Gain / Loss on Ex. Diff. allowed on MTM basis Premium / Discount – To be amortised over contract life (Same as AS-11) As per ICDS Gain / Loss on Ex. Diff. allowed at the time of settlement Premium / Discount – allowed at the time of settlement (AS-11 – Gain/loss on MTM basis) ICDS treatment conflicts CBDT Instruction No. 3/2010 (to the extent of MTM Loss) No distinction between capital and revenue account in ICDS Slide 10

11. Part 3 – Other Forex Derivatives Other Forex derivatives like Currency futures, Currency swaps, Interest-rate swaps, etc. CBDT Committee recommended for separate ICDS for Financial Instruments If not covered under ICDS VI, then ICDS I relating to Accounting Policies may apply -MTM loss not to be recognized unless such loss recognized in accordance with other ICDS -MTM loss – not allowed; Treatment of MTM gain in such cases? Slide 11

12. ICDS VII – Government Grants Slide 12

13. ICDS VII – Government Grants... Key Aspects: ICDS provides Government Grants not to be recognised until there is reasonable assurance that -Person shall comply with the conditions attached to them; and -Grants shall be received [Para 4(1)] Recognition not to be postponed beyond date of actual receipt [Para 4(2)] Govt. grant to be recognized on receipt basis irrespective of conditions fulfilled? Recent Amendment Amendment in S. 2(24) – Finance Act 2015 -Subsidy, grant, etc. (other than reduced from actual cost) to be treated as income – LPG Subsidy? -Relevance of “Purpose” test ignored -Favourable judicial decisions overruled [Ponni Sugars (306 ITR 392)(SC), Sahney Steels (228 ITR 253)(SC), Reliance Industries (339 ITR 632)(Bom.)] Slide 13

14. …ICDS VII – Government Grants… Recognition under different situations: Sr No Nature of GrantPosition under ICDS 1For depreciable asset Reduced from actual cost / WDV 2For non-depreciable asset (subject to fulfilment of obligations) Recognised as deferred income 3Non-monetary asset at concessional rate Not as income Asset to be recorded at acquisition cost 4Other Grants (residuary clause) Recognised as income 5For non-depreciable asset (with no obligations) Credited to Capital Reserve (AS-12) ICDS silent; Recognised as income under residuary clause? Grants in nature of promoters’ contribution Slide 14

15. …ICDS VII – Government Grants.. Disclosures Disclosures Slide 15 Nature and extent of Government grants not recognised during FY as income and reasons thereof Nature and extent of Government grants not recognised during FY by way of deduction from actual cost of asset or assets or from WDV of block of assets and reasons thereof Nature and extent of Government grants recognised during FY as income Nature and extent of Government grants recognised during FY by way of deduction from actual cost of asset or assets or from WDV of block of assets during the FY

16. ICDS VIII – Securities Slide 16

17. ICDS VIII – Securities... Key Differences vis-à-vis ICAI AS-13: Relevant AspectPosition under ICAI AS-13Position under ICDS ApplicabilityCovers long-term, current investments but excludes securities held as stock-in-trade Deals only with securities held as stock-in-trade (shares, debt securities, convertible securities and any other securities not covered above) Approach for year- end valuation Individual security wisePortfolio approach Year-end valuation of unlisted securities Cost or NRV, whichever is lowerActual cost Determination of cost where specific identification not possible Weighted Average methodFIFO Method Not applicable to securities held by MFs, VCF, Banks, Public Financial Institutions, FIIs; However, applies to stock brokers, NBFCs, traders Slide 17

18. …ICDS VIII – Securities... Key Issues: Portfolio approach vis-à-vis individual security wise valuation -Taxation of notional profits -Double taxation of same income when the security is sold (assuming MAT) Implication of section 145A? Individual SecurityCostNRVValuation Company A10020 Company B10030 Company C10040 Company D100300100 Valuation (ICAI AS-13)190 Valuation (under ICDS)400390 Slide 18

19. …ICDS VIII – Securities... ParticularsRs.ParticularsRs. Opening stock200 Closing stock as per ICDS 390 Notional Income190 Total390Total390 Illustration… AY 2016-17 – Tax payable under normal provisions Tax on notional profit of 190

20. …ICDS VIII – Securities... ParticularsRs.ParticularsRs. Opening stock as per books of accounts 190 Sale450 Income260 Total450Total450 …Illustration AY 2016-17 – Tax payable under MAT Mat payable on book profit of 260 Double taxation on notional income of 190 No set-off for tax paid on notional income

21. …ICDS VIII – Securities Actual cost – comprises of purchase price and acquisition charges such as brokerage, fees, tax, duty or cess -STT also included in actual cost (section Pre-acquisition period interest -ICDS allows interest for pre-acquisition period to be reduced from actual cost -ICDS treatment in line with prevalent industry practice Unlisted securities and thinly traded securities to be valued at cost only regardless of NRV -Difficulty where securities are delisted or become thinly traded during a particular year. -Opening stock of such securities may be valued at NRV (being lower than cost) whereas closing stock may be valued at cost resulting in artificial income Slide 21

22. Major impact areas Slide 22 Preponement of income and deferral of expenses Capital receipts being called ‘income’ (e.g. Forex fluctuation) - Conflict with settled judicial principles ‘Real income’ theory whether overridden? (e.g. Retention money, Contingent assets, Bucket approach) Mismatch with MAT due to timing differences between books and tax Forex derivative loss only on actual settlement basis (except F&O contracts for hedging purposes)

23. Questions?

24. Thank You