Indian economy is in the process of converging with the world economy. We will be going to witness a lot of changes in our legal as well as regulatory and accounting framework. The initial steps required to reach that milestone have already been taken.
“Principles that have gain international acceptance have been adopted. The best practices in the world have been studied and incorporated.”
Mr. Pranab Mukherjee H’ble Finance Minister
Source : Discussion Paper on Direct Tax Code, 2009
The first step in this process is the implementation of Goods & Service Tax (GST) in place of various indirect taxes, such as, excise act, service tax, vat, octrio, etc. The GST will be implemented by the beginning of April, 2010, i.e, 01/04/2010. GST is a single rated tax and more than 140 countries are currently using it. Since it is a single rated tax system, therefore it will eliminate the problem of double taxation.
The second is the adoption & converging to International Financial Reporting Standards (IFRS). More than 100 countries are using IFRS. As we all know that accounting is a language and the language which we follow in India, i.e, Accounting Standards (AS) is having certain differences in comparison to the IFRS.
This creates the situation in which the two sets of accounts, one based on the IFRS and the other one based on the Indian GAAP (i.e. AS) becomes unrivaled. As the globalization in India is taking place at a very fast pace, so if it has to invest abroad or attract inbound investment it must follow global standards.
To remove this hindrance the ICAI has taken the initiative, and issued the directive that the India will be converging to IFRS by financial year 2011-12, i.e. 01/04/2011. For the purpose of comparative figures, the transitional period will be 2010-11 (i.e. Date of Transition 01/04/2010), which means for the period 2010-11, the two sets of accounts should be maintained, one as per Indian AS and the other one as per the IFRS, i.e. parallel accounting will take place. The reporting date will be 31/03/2012.
2010-2011 - Transition Period, required for comparative figures
Date of transition 01/04/2010
2011-2012 - Reporting Period
Date of Convergence 01/04/2011
Date of Reporting 31/03/2012
Initially it will be mandatory only for the public listed companies or the companies in which the stake of public is involved. Later on it will be extend to other companies also.
The Indian GAAP is based on the historical cost based model and the IFRS follows the fair value approach. This is the basic difference between the two. After adoption of the IFRS the financial statements will reflect the true picture of the organization, instead of the historical cost which may be not relevant today.
But the fair value concept will further give rise to certain problems. As it is very subjective matter to decide the fair value of an event. The fair value for one person may be different and for other it may be different. So the main challenge will be to determine that fair value.
It will also involve the recognition of assets which are not classified as per Indian GAAP, such as, Carbon Credits, Derivatives etc. and there are many other issues also which will arise due to the difference between the two standards during the first time adoption of IFRS.
And the last step in this process is the implementation of the new Direct Tax Code, 2009.The draft Direct Tax Code along with a Discussion Paper is presented in the Parliament by the Honorable Finance Minister Mr. Pranab Mukherjee on 12th day of August, 2009.
This Code will be effective from 01/04/2011.
The thrust of the Code is to improve the efficiency and equity of our tax system by eliminating the distortions of the tax structure, introducing moderate level of taxation and expanding the tax base.
The strategy to broadening the tax base mainly involves three elements:
1. For many decades, escalating ranges of exemptions which are eroding the tax base. Removal of these exemptions will have following consequences-
(a) A higher tax to GDP ratio
(b) High GDP growth rate
2. Removal of ambiguity in the provisions.
3. Checking of erosion of tax base through tax evasion.
This Direct Tax Code, 2009 is the consolidation of Income Tax, Wealth Tax, Dividend Distribution Tax & Fringe Benefit Tax. It will further provide the simple language as to convey, with clarity, the intent, scope & amplitude of the provisions of the law.
As the economy is expending at a very fast pace, tax base is also increasing, and the bulk of them includes the small payers for whom the compliance cost should be low. Simple language will voluntarily lead to the compliance.
Provisos & explanations have been eliminated which was incomprehensible to the non-experts. There has been extensive use of formulas & tables to simplify the issues.
It further reduces the ambiguity involved in the provisions, which previously gives rise to the different interpretations, thereby reducing the scope of litigation. The powers have been delegated to the Central Government/CBDT to avoid the protracted litigation.
It further provides the flexibility, i.e. the Code is capable to adjust itself to accommodate the change in the economy. The general & essential features are incorporated in the Statute and the matters requiring detailed discussion have been dealt in the Rules/Schedules.
This Code will further provide the stability to the entire tax structure. In current scenario, the tax rates are determined by the Finance Act of the relevant year, therefore there is a certain degree of instability & uncertainty in the prevailing rates of taxes. But in the new Direct Tax Code, all rates form part of the First to Fourth Schedule of the Code itself, thereby obviating the need for an annual Finance Bill. The changes in the rates, if any, will be done through the amendments in the Code through the proper Amendment Bills.
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