Skip to main content

New tax accounting standards may reduce leeway for infrastructure companies


Tax officials and industry experts will discuss new tax accounting standards for infrastructure companies in July, a person aware of the matter said. The new standards are expected to reduce the discretion these companies use in deciding how and when they recognize revenue from their projects.

Officials representing the income-tax department, accounting body the Institute of Chartered Accountants of India (ICAI) and outside experts will discuss the norms and subsequently seek comments from public, the person mentioned above said on condition of anonymity.

The proposed Income Computation and Disclosure Standards (ICDS) for ‘build, operate and transfer’ (BOT) projects will force many companies to recognize revenue earlier and pay tax earlier as well.

Given the rebound in highway development and expected investments in the infrastructure sector, this could result in an immediate boost to tax receipts. However, ICDS will only curtail the flexibility of developers to defer taxes, and not increase the actual tax outgo.

“At the moment, there is no accounting standard for BOT, only a guidance note prepared by ICAI is available, resulting in companies adopting divergent accounting policies. The main idea is to give clarity to taxpayers in the absence of a standard,” said the person quoted above, adding that the diversity in reporting needs to be addressed.

The move is part of the government’s strategy to insulate taxation from the book profits that companies prepare for the benefit of shareholders and regulators under provisions of the Companies Act.

Finance minister Arun Jaitley said on 1 April that India requires about Rs43 trillion ($646 billion) of investment in infrastructure in the next five years.

At present, in a BOT or a build, own, operate and transfer (BOOT) project of 10 or 20 years’ tenure in which revenue is earned over the life of the project, developers have the flexibility to recognize revenue over a period of time, offering them a lot more accounting flexibility than in other sectors, said Riaz Thingna, director, Grand Thornton Advisory Pvt. Ltd.

“Each company may adopt a different method as per their requirement. Greater clarity on revenue recognition in these highly capital-intensive projects will help investors plan and manage their cash flows better. Also, ICDS is likely to accelerate revenue recognition in the case of many projects,” said Thingna.

Infrastructure companies’ financial statements on revenue recognition vary widely also because of the two different accounting requirements for the industry mandated by the company law.

Companies Act requires listed entities and unlisted ones with Rs500 crore or more of net worth and their associates to follow Ind AS, a set of accounting standards based on the ‘fair value’ concept, from 2016-17. These standards make financial statements reflect the market value of assets and liabilities at a given point in time—something that is helpful for investors, but not to the tax department as gains or losses for tax purposes do not arise merely because of price fluctuation in assets held, where no transaction takes place.

Smaller companies follow Indian Generally Accepted Accounting Principles (GAAP), based on the principle of prudence. Infrastructure assets are at present allowed under existing accounting norms to be classified either as capital assets, financial assets or as intangible assets that guarantee a right over a future stream of revenue.

The proposed tax accounting standards will make sure that no matter which accounting standard companies follow and what flexibility they exercise, the tax outgo for projects of similar nature will be the same across the industry.

Sai Venkateswaran, partner and head of accounting advisory services KPMG India, said ICDS could potentially impact the timing of the tax outgo for infrastructure firms and the manner in which assets and related income are characterized, while it may not have a significant impact on the total quantum of profits recognized over the life of the a project.

Venkateswaran said firms following Ind AS have already started recognizing revenue from service concession arrangements in line with global practices that are adopted in Ind AS. (BOT projects are considered to be a service rendered to government).

So far, the tax department has notified 10 different standards under ICDS from fiscal year 2016-17.A draft ICDS for the real estate sector was released last week for public comments.

Mint New Delhi, 16th May 2017

Comments

Popular posts from this blog

Household debt up, but India still lags emerging-market economies: RBI

  Although household debt in India is rising, driven by increased borrowing from the financial sector, it remains lower than in other emerging-market economies (EMEs), the Reserve Bank of India (RBI) said in its Financial Stability Report. It added that non-housing retail loans, largely taken for consumption, accounted for 55 per cent of total household debt.As of December 2024, India’s household debt-to-gross domestic product ratio stood at 41.9 per cent. “...Non-housing retail loans, which are mostly used for consumption purposes, formed 54.9 per cent of total household debt as of March 2025 and 25.7 per cent of disposable income as of March 2024. Moreover, the share of these loans has been growing consistently over the years, and their growth has outpaced that of both housing loans and agriculture and business loans,” the RBI said in its report.Housing loans, by contrast, made up 29 per cent of household debt, and their growth has remained steady. However, disaggregated data sho...

External spillovers likely to hit India's financial system: RBI report

  While India’s growth remains insulated from global headwinds mainly due to buoyant domestic demand, the domestic financial system could, however, be impacted by external spillovers, the Reserve Bank of India (RBI) said in its half yearly Financial Stability Report published on Monday.Furthermore, the rising global trade disputes and intensifying geopolitical hostilities could negatively impact the domestic growth outlook and reduce the demand for bank credit, which has decelerated sharply. “Moreover, it could also lead to increased risk aversion among investors and further corrections in domestic equity markets, which despite the recent correction, remain at the high end of their historical range,” the report said.It noted that there is some build-up of stress, primarily in financial markets, on account of global spillovers, which is reflected in the marginal rise in the financial system stress indicator, an indicator of the stress level in the financial system, compared to its p...

Retail inflation cools to a six-year low of 2.82% in May on moderating food prices

  New Delhi: Retail inflation in India cooled to its lowest level in over six years in May, helped by a sharp moderation in food prices, according to provisional government data released Thursday.Consumer Price Index (CPI)-based inflation eased to 2.82% year-on-year, down from 3.16% in April and 4.8% in May last year, data from the Ministry of Statistics and Programme Implementation (MoSPI) showed. This marks the fourth consecutive month of sub-4% inflation, the longest such streak in at least five years.The data comes just days after the Reserve Bank of India’s (RBI) Monetary Policy Committee cut the repo rate by 50 basis points to 5.5%, its third straight cut and a cumulative reduction of 100 basis points since the easing cycle began in February. The move signals a possible pivot from inflation control to supporting growth.Food inflation came in at just 0.99% in May, down from 1.78% in April and a sharp decline from 8.69% a year ago.A Mint poll of 15 economists had projected CPI ...