TaxTMI 
TaxTMI 
Valuation of Inventory and Securities under Indian Tax Law : Clause 277 of the Income Tax Bill, 2025 and Section 145A of the Income-tax Act, 1961
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.... computation. The proper valuation of these items is critical, as it directly impacts the income reported and the resultant tax liability. Clause 277 seeks to consolidate, clarify, and, in some respects, modify the approach to inventory and securities valuation as compared to Section 145A. Both provisions are closely linked to the Income Computation and Disclosure Standards (ICDS), which provide the technical framework for the computation of taxable income. The legislative intent is to ensure consistency, transparency, and uniformity in the valuation process, thereby reducing litigation and ambiguity. This commentary provides a comprehensive analysis of Clause 277, examines its objectives, detailed provisions, practical implications, and co....
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....-clause (1): General Provisions for Valuation * Valuation of Inventory (Clause (i)): Inventory must be valued at the lower of actual cost or net realisable value (NRV), computed according to the ICDS notified u/s 276(2). This is consistent with the principle of prudence and aligns with standard accounting practice, ensuring that income is not overstated by carrying inventory at inflated values. * Adjustment for Taxes, Duties, Cess, or Fees (Clause (ii)): The value of purchases, sales, and inventory must be adjusted to include any tax, duty, cess, or fee actually paid or incurred to bring the goods or services to their present location and condition. This ensures that the cost basis reflects the total expenditure necessary to acquire or ....
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....cedural detail, as it allows for aggregation within categories, potentially smoothing out valuation fluctuations and aligning with practical portfolio management approaches. 4. Sub-clause (4): Definition of Taxes, Duties, Cess, or Fees Any tax, duty, cess, or fee under any law in force is to be included in the valuation, irrespective of any right arising as a consequence of such payment. This clarifies that contingent or recoverable statutory levies are not to be excluded from the cost base, closing a potential loophole and ensuring consistency. 5. Sub-clause (5): Definition of Public Financial Institution "Public financial institution" is defined by reference to section 2(72) of the Companies Act, 2013, ensuring that the term is interp....
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....analysis addresses each key provision: 1. Valuation of Inventory * Section 145A: Inventory is to be valued at the lower of actual cost or NRV, in accordance with ICDS notified u/s 145(2). * Clause 277: The same principle is retained, but the reference is to ICDS notified under the new section 276(2). The language is nearly identical, preserving the substance of the existing law. * Implication: There is no substantive change in the principle; the shift is primarily to align with the restructured provisions of the new Income Tax Bill. 2. Adjustment for Statutory Levies * Section 145A: Requires the inclusion of any tax, duty, cess, or fee actually paid or incurred in the valuation of purchases, sales, and inventory. * Clause 277: U....
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....ies is respected. * Implication: The provision prevents conflicts between tax law and prudential regulation, maintaining systemic stability. 6. Category-wise Valuation * Section 145A (Proviso): The comparison of actual cost and NRV for securities is to be made category-wise. * Clause 277(3): Repeats this requirement, ensuring a practical and fair approach to portfolio valuation. * Implication: Aggregation within categories can mitigate the impact of market volatility on reported income. 7. Treatment of Taxes, Duties, Cess, or Fees * Section 145A (Explanation 1): Clarifies that all such payments are to be included in the cost base, even if a right arises as a consequence of such payment. * Clause 277(4): Contains an equivalent ....
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....at the provision applies equally to service providers, addressing potential ambiguities under the current law. * Procedural Clarity: The structure of Clause 277, with separate sub-clauses and explicit cross-references, may enhance clarity and ease of compliance. Comparative Perspective: International Practices The approach adopted in Clause 277 and Section 145A is broadly consistent with international accounting and tax standards, such as International Financial Reporting Standards (IFRS) and US Generally Accepted Accounting Principles (GAAP), which also require inventory to be valued at the lower of cost or market/NRV. The specific requirement to include statutory levies in the cost base is a distinctive feature of Indian tax law, refl....