Tax Accounting

Reviewed by Annapoorna | Updated on Aug 27, 2020

Introduction

Tax accounting dictates the specific set of rules that income tax assessees such as businesses and individuals should follow when preparing their tax returns. The Indian income tax law defines Income Computation and Disclosure Standards (ICDS) which are tax accounting standards in India.

What is Tax Accounting?

Tax accounting is a structure of accounting methodologies that focuses on taxes instead of the annual audited financial statements of companies. The Income Tax Act, 1961 defines specific ICDS similar to notified Indian accounting standards(AS).

Tax accounting is the way to account for taxation purpose. Tax accounting intends to enable the tracking of funds (inflow and outflow) connected with individuals and entities.

There are ten ICDS notified so far, as follows: 1. ICDS-I -Accounting Policies 2. ICDS-II -Valuation of Inventories 3. ICDS-III -Construction Contracts 4. ICDS-IV -Revenue Recognition 5. ICDS-V -Tangible Fixed Assets 6. ICDS-VI -Effects of changes in foreign exchange rates 7. ICDS-VII -Government Grants 8. ICDS-VIII -Securities 9. ICDS-IX -Borrowing Costs 10. ICDS-X -Provisions, Contingent Liabilities and Contingent Assets

Who is eligible to pay?

As per the section 145 of the Indian Income Tax Act, 1961, any assessee having taxable income under the following heads of income should compute their taxable income after considering ICDS.

Profits and gains from business or profession or Income from Other Sources. They can follow either the cash or the mercantile system of accounting.

Moreover, the section lets the Central Government notify from time to time such class of taxpayers or level or class of income to which these ICDS may apply.

It applies to every person earning the heads of income—individuals, businesses, corporations, and other entities. Even those exempted from paying taxes must form part of tax accounting.

A detailed breakdown of the procedure for filling the tax

Tax accounting standards apply to only the computation of the income and not for maintenance of the books of accounts. In case of any conflict, the income tax law will prevail over the ICDS. These do not provide any explanations or illustrations like AS. These only lay down the principles to be adopted for computing Income. Revenue or expenses which do not have an ICDS to refer to will continued to be governed by existing AS.

While computing income as per ICDS, it must be noted that it will not have any impact on the minimum alternate tax (MAT) for corporate assessees. It is because these will be based on the book profits to be determined as per the current applicable AS.