In a move to curtail discretion of real estate players over how and when they recognise revenue from projects, the tax department has proposed to introduce new accounting standards for developers to compute their tax outgo.
The new standard would apply irrespective of financial statements prepared under the Companies Act for the benefit of shareholders and other regulatory purposes.
The Central Board of Direct Taxes (CBDT), the apex direct-tax policymaking body of the government, on Thursday sought comments on the draft Income Computation and Disclosure Standards (ICDS) on realty transactions by 26 May.
The draft is based on a guidance note on the subject issued by accounting rule maker Institute of Chartered Accountants of India (ICAI), according to an official statement.
The tax authority wants uniformity in the way realty firms recognize revenue. At present, there is diversity in their accounting due to the flexibility available under the current way taxes are computed as well as because of the fact that large companies have already migrated to IndAs, the new “fair-value based” accounting system mandatory from 1 April 2016 for companies with net worth above Rs500 crore and their arms. Smaller companies still follow the Indian Generally Accepted Accounting Principles (GAAP).
While calculating the tax liability of a company, the income-tax department usually makes certain adjustments to profits reported in the financial statements under the accounting standards mandated by the Companies Act.
One such example is using a different depreciation rate for calculating tax liability. ICDS consolidates such adjustments in the form of accounting standards for tax purposes for different sectors. Already, 10 different ICDS are in force from fiscal year 2016-17. These take precedence over both Indian GAAP as well as IndAS for taxation purposes.
Experts said at present, some real estate firms recognize revenue only after completing a project, while others start recognizing it after completing a part. Even those taking the latter approach, differ in terms of the stage at which they start showing revenue in their books. ICDS will make sure that irrespective of the approach taken in financial statements, for tax purposes revenue is recognized when it is accrued.
“The draft ICDS seeks to bring consistency in the way real estate players in India report their revenues for tax purposes, an area in which there is diversity in current practices. The CBDT is expected to issue a few more standards in due course to deal with some areas not covered by the currently applicable standards as well as some sectoral issues,” said Sai Venkateswaran, partner and head of accounting advisory services, KPMG India.
“The draft ICDS is a positive move since it seeks to bring clarity with regard to recognition of real estate revenues for tax purposes and should end any debate on use of completed contract method,” said Gaurav Karnik, tax partner and real estate practice leader at EY.