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    ManualsIncome Tax
    What is the impact of ICDS X containing transitional provisions.
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    Transitional provisions for ICDS X ensure recognition of provisions and contingent items to prevent double taxation or omission.
    Transitional recognition under ICDS X requires that provisions, contingent liabilities and contingent assets and related income be recognised for previous years commencing on or after 1 April 2016 in accordance with this standard, after taking into account any amount recognised for the same items for previous years ending on or before 31 March 2016; the rule aims to prevent double taxation or omission of income.
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    Under ICDS X, whether reversal of an asset and the related income would mean that the entry which wa...
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    Supremacy of tax law: reversal of an ICDS-recognised asset must follow tax deduction rules, permitting write-off as bad debt.
    Reversal of an asset and related income recognised under ICDS X must conform to the Income-tax Act where conflicts arise; the Act's tax-deduction treatment applies, allowing write-off as a bad debt rather than simply reversing the original accounting recognition entry.
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    Set-off of provisions: expenditures may be set off only against the original provision, not provisions for different purposes.
    Under ICDS X, expenditures must be set off only against the original provision for which they were recognised; expenditures cannot be offset against provisions recognised for a different event or purpose, as that would conceal the separate financial effects of distinct events and undermine transparent disclosure of provisions, contingent liabilities and contingent assets.
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    Expenditure on post-retirement benefits like provident fund, gratuity, etc. are covered by specific ...
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    Employee post retirement benefit provisioning excluded from ICDS X, governed by specific statutory provisions for income computation.
    Provisioning for employee post retirement benefits covered by AS 15 shall continue to be governed by specific provisions of the Act and are not dealt with by ICDS X; ICDS X does not apply to liabilities otherwise falling within AS 15.
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    Borrowing costs capitalization requires capitalizing interest for qualifying assets; inventory only when production is prolonged.
    Borrowing costs directly attributable to acquisition, construction or production of tangible and intangible assets must be capitalized as part of the asset cost. Inventory borrowing costs are capitalized only when the inventory requires an extended period to become saleable. Specific borrowings for a qualifying asset require capitalization of actual borrowing costs incurred during the qualifying period. For general borrowings, a formulaic allocation apportions borrowing costs to qualifying assets based on the ratio of qualifying assets to total assets.
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    Inventory preparation processes define activities included in inventory cost when making goods fit and saleable under accounting standards.
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    Borrowing cost capitalization must exclude portions disallowed by specific statutory provisions, only allowable amounts may be capitalised.
    Borrowing costs capitalised under ICDS IX must exclude amounts disallowed by specific provisions of the Act; only the portion of borrowing cost that remains allowable under the Act may be capitalised, because specific statutory disallowances override ICDS treatment.
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    Capitalization of borrowing costs: general borrowing must be allocated to qualifying assets and capitalized on an asset-by-asset basis.
    General borrowing costs computed under the ICDS-IX formula must be apportioned among qualifying assets and capitalized on an asset-by-asset basis, so that each qualifying asset's capitalized borrowing cost reflects its proportionate share of general borrowing under the standard.
    ManualsIncome Tax
    Under ICDS IX does borrowing cost include exchange differences arising from foreign currency borrowi...
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    Exchange differences excluded from borrowing costs under ICDS IX; foreign exchange effects governed by ICDS VI.
    Exchange differences from foreign currency borrowings that are treated as adjustments to interest are excluded from borrowing costs under ICDS IX; the effects of changes in foreign exchange rates, including those relating to interest, are governed by ICDS VI.
    ManualsIncome Tax
    Whether bill discounting charges and other similar charges would fall under the definition of borrow...
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    Borrowing cost: bill discounting and similar charges treated as borrowing cost, except when not tied to borrowed funds.
    The definition of borrowing cost is inclusive and generally covers bill discounting charges and similar charges as borrowing cost for income computation and disclosure; however, discounting charges that do not arise from borrowing funds are excluded from that definition.
    ManualsIncome Tax
    Which are the borrowing costs covered by ICDS IX.
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    Borrowing costs include interest and related charges such as commitment charges, amortised discount and finance lease charges.
    Borrowing costs under ICDS IX comprise interest and other costs incurred in connection with borrowing funds, including commitment charges, amortised discount or premium, amortised ancillary costs in arranging borrowings, and finance charges for assets taken on finance lease.
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    What is the manner in which securities held as stock-in-trade are required to be valued.
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    Valuation of securities as stock-in-trade: mandatorily at lower of actual cost and net realizable value.
    Securities held as stock-in-trade must be valued at the lower of actual cost initially recognized and net realizable value at year-end. Unlisted or unquoted securities held as stock-in-trade are to be measured at actual cost as initially recognized, under the income computation and disclosure standards framework.
    ManualsIncome Tax
    Para 9 of ICDS-VIII on securities requires securities held as stock-in-trade shall be valued at actu...
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    Valuation of securities: aggregate category wise cost compared with net realisable value, lower amount taken as carrying value.
    For subsequent measurement under ICDS VIII, securities held as stock in trade are aggregated category wise; for each category the aggregate cost and aggregate net realisable value are compared, and the lower of the two is taken as the carrying value.
    ManualsIncome Tax
    Which ICDS would govern derivative instruments.
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    Derivatives accounting: ICDS VI governs typical derivatives, ICDS I applies residually, capital-asset derivatives are excluded.
    ICDS VI supplies guidance for derivative contracts such as forward contracts; derivatives outside ICDS VI's scope fall under ICDS I. Derivative instruments that qualify as capital assets are excluded from ICDS and thus not governed by those standards.
    ManualsIncome Tax
    For subsidy received prior to 1st day of April 2016 but not recognised in the books pending satisfac...
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    Recognition of government grants: pre-existing grants deemed recognised on receipt while later grants follow ICDS recognition criteria.
    Grants actually received before the ICDS effective date are deemed recognised on receipt under Para 4(2) of ICDS VII and remain governed by pre-ICDS law; grants received on or after the effective date must be recognised only when the ICDS VII recognition criteria in Paras 5-9 are satisfied, with recognition then following ICDS VII.
    ManualsIncome Tax
    How to deal with a situation where compensation is payable for the purposes of giving ‘immediate f...
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    Government grant for immediate financial support must be recognised when receivable, irrespective of actual receipt.
    Government grants given as immediate financial support and not tied to specific expenditure must be recognised when the grantee is entitled and sums become receivable; actual receipt is immaterial. If the grant is confined to an individual enterprise and grant-related conditions are met, recognition occurs in the period of receivability, governing timing of income inclusion and disclosure under the income computation framework.
    ManualsIncome Tax
    Whether a grant which is not directly relatable to non-depreciable assets should be concluded as an ...
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    Government grants treatment: grants not directly relatable to nondepreciable assets treated as taxable income rather than reduction in asset cost.
    Grants not directly relatable to nondepreciable assets are to be recognised as taxable income under the Act rather than deducted from asset cost; the ICDS preamble confirms the Act prevails over ICDS, and paragraph 7 of ICDS VII applies solely to depreciable assets where reduction of asset cost is appropriate.
    ManualsIncome Tax
    Where the grants are received for assets which are outside the block of assets, then what is the tre...
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    Recognition of government grants: generally recognized as income on receipt unless reasonable certainty permits spreading with related costs.
    Grants for assets outside the block of depreciable assets are to be recognized as income; statutory tax provisions control and preclude spreading recognition beyond the year of receipt, except where there is reasonable certainty of receipt permitting deferral and matching with costs incurred for obligations related to the non-depreciable assets.
    ManualsIncome Tax
    Whether grants should be recognised even in cases where there is no certainty that the conditions at...
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    Recognition of government grants: must occur on receipt; potential reversals are applied against unamortized deferred credit balances.
    ICDS VII requires government grants to be recognised on the date of receipt and prohibits deferral beyond receipt; where grants become refundable because attached conditions are unmet, reversal of initial recognition must first be applied to the unamortized deferred credit arising from the grant, so income recognition must reflect both receipt and the certainty of meeting conditions.
    ManualsIncome Tax
    How are Government grants to be recognized.
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    Recognition of government grants requires reasonable certainty of compliance and receipt; disclose in income computation accordingly.
    Under ICDS VII, government grants are to be recognized when there is reasonable certainty that the related conditions will be complied with and that the grants will be received; such grants should not be postponed beyond the actual receipt date for income computation and disclosure purposes.

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      Rationalisation of provisions related to Sovereign Wealth Fund (SWF) and Pension Fund (PF)

      1 February, 2021

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      Budget 2021-22 + FINANCE Bill, 2021

      Rationalisation of provisions related to Sovereign Wealth Fund (SWF) and Pension Fund (PF)

      Clause (23FE) of section 10 of the Act provides for the exemption to specified persons from the income in the nature of dividend, interest or long-term capital gains arising from an investment made by it in India. Specified persons are SWF or PF which fulfils conditions prescribed therein and are specified for this purpose by the Central Government through notification in the Official Gazette. This provision was introduced through the Finance Act, 2020 to encourage investments of SWF and PF into infrastructure sector of India. Subsequent to enactment, a notification was also issued to enlarge the scope of infrastructure activities eligible for investments. One SWF has already been notified under this provision. In order to rationalise the provision of this clause and to remove the difficulties in meeting some of the conditions, the followings amendments are proposed in the Bill:

      • Allowing Alternate Investment Fund (AIF) to invest up to 50% in non-eligible investments

      Presently SWF/PFs may invest in a Category-I or Category-II Alternative Investment Fund, having 100% investment in eligible infrastructure company. It is proposed to:

      (a) relax the condition of 100% to 50%.

      (b) allow the investment by Category-I or Category-II AIF in an Infrastructure Investment Trust (InvIT).

      (c) Exemption under this clause shall be calculated proportionately, in case if aggregate investment of AIF in infrastructure company or companies or in InvIT is less than 100%.

      • Investment through holding company

      Presently, SWF/PFs are not allowed to invest through holding company. It is proposed to allow the same subject to the following conditions:

      (a) Holding company should be a domestic company.

      (b) It should be set up and registered on or after 1st April, 2021.

      (c) It should have minimum 75% investments in one or more infrastructure companies.

      (d) Exemption under this clause shall be calculated proportionately, in case if aggregate investment of holding company in infrastructure company or companies is less than 100%

      • Investment in NBFC- IDF/IFC (non-banking finance company-infrastructure debt fund/Infrastructure finance company)

      Presently, SWF/PFs are not allowed to invest in NBFC-IFC/IDF. It is proposed to allow the same subject to the following conditions:

      (a) NBFC-IDF/IFC should have minimum 90% lending to one or more infrastructure entities.

      (b) Exemption under this clause shall be calculated proportionately, in case if aggregate lending of NBFC-IDF or NBFC-IFC in infrastructure company or companies is less than 100%.

      • Loan or borrowings by SWF/Pension Fund

      Presently, SWF/PFs are not allowed to have loans or borrowings or deposit or investments as there is a condition that no benefit should enure to private person. It is proposed to provide that there should not be any loan or borrowing for the purpose of making investment in India. It is also proposed to provide that the condition regarding no benefit to private person and assets going to government on dissolution would not apply to any payment made to creditor or depositor for loan taken or borrowing other than for the purpose of making investment in India.

      • Commercial activity

      Presently, SWF/PFs are not allowed to undertake any commercial activity. This condition is proposed to be removed and replaced with a condition that SWF/PFs shall not participate in day to day operation of investee. However, appointing director and executive director for monitoring the investment would not amount to participation in day to day operation.The term "investee" is propoed to define to mean a business trust or a company or an enterprise or an entity or a category I or II Alternative Investment Fund or an Infrastructure Investment Trust or a domestic company or an Infrastructure Finance Company or an Infrastrure Debt Fund, in which the SWF or PF, as the case may be, has made the investment, directly or indirectly, under the provisions of this clause.

      • Liable to Tax

      Presently, some PFs are liable to tax in their country though given exemption subsequently. It is proposed to amend this sub-clause to provide that if pension fund is liable to tax but exemption from taxation for all its income has been provided by the foreign country under whose laws it is created or established, then such pension fund shall also be eligible.

      • Rules to prescribe the method of calculation

      It is also proposed to provide that the Central Government may prescribe the method of calculation of 50% or 75% or 90%referred above.

      This amendment will take effect from 1st April, 2021 and will accordingly apply to the assessment year 2021-22 and subsequent assessment years.

      [Clause 5]

       

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      Budget 2021-22 + FINANCE Bill, 2021

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