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<a href="http://www.businessinsider.in/searchresult.cms?query=Finance+Ministry&amp;sortorder=effectivedate">Finance Ministry</a> has finally decided to consider <a href="http://www.businessinsider.in/searchresult.cms?query=India+Inc&amp;sortorder=effectivedate">India Inc</a>’s pleas to abolish the Income Computation and Disclosure Standards (ICDS). <a href="http://www.businessinsider.in/searchresult.cms?query=IDCS+&amp;sortorder=effectivedate">IDCS </a>came into effect from the financial year commencing April 1, 2016 (FY2016-17). 
 
<a href="http://www.businessinsider.in/searchresult.cms?query=Budget+2017&amp;sortorder=effectivedate">Budget 2017</a> is also likely to light up the road for transition towards a new accounting year - January to December - instead of the currently prevailing 12-month period starting on April 1 of one year and ending on March 31 of the next calendar year. 
 
According to a report by the Justice Easwar-led committee on I-T simplification, ICDS has drawbacks. In the report, it told about multiple accounting methods - one for the books of accounts (under the Companies Act) and the other for tax purposes (ICDS) create confusion, interpretation issues, and additional compliance burden, which may outweigh any gains to be obtained. It had called for a further study of implications. 
 
“ICDS is not in line with fundamental principles of accounting and taxation, viz: prudence, materiality and accounting of foreseeable losses. In several situations, this results in advancing the recognition of income or deferring recognition of expenses or losses - both of which have a potential tax impact (see table)," Ameet Patel, chairperson of the taxation committee at <a href="http://www.businessinsider.in/searchresult.cms?query=Bombay+Chartered+Accountants%27+Society&amp;sortorder=effectivedate">Bombay Chartered Accountants' Society</a> (BCAS), told ET. 
 
BCAS is one of the many associations that has represented to the government for scrapping of ICDS. 
 
For the purpose of computing advance taxes and also for filing of I-T returns, taxpayers have to adopt ICDS. The due dates of the returns for the <a href="http://www.businessinsider.in/searchresult.cms?query=FY2016-17&amp;sortorder=effectivedate">FY2016-17</a> - the first year of application of ICDS - fall in the second half of 2017 onward. These standards apply to all taxpayers who follow the mercantile system of accounting for computing income under the heads 'Profits and gains from business and profession' or 'Income from other sources'. 
 It is mandatory for <keyword id="46431" type="CITY" weightage="20" keywordseo="India-Inc">India Inc</keyword> to follow the mercantile system. Also, individuals and Hindu Undivided Families are exempt from application of ICDS if they do not fall in the category of those who have to get their accounts audited for tax purposes. 
 
Taxpayers are already facing challenges relating to adoption of ICDS and its abolition will be welcomed. 
 
"Indian Accounting Standards (IndAS), introduced by the ministry of corporate affairs, are already in place for larger listed companies. From April 1, 2017, their ambit will be wider. IndAS is closely aligned to international accounting standards and already serves the objective of real-time disclosure and accounting of income. Thus, there is no plausible reason for introduction of ICDS and adding to the administrative burden of India Inc," Sudhir Kapadia, tax leader at EY India, told ET. 
 A committee led by former chief economic adviser Shankar Acharya recently submitted its report to the <keyword id="47209" type="ORGANIZATION" weightage="20" keywordseo="Finance-Ministry">finance ministry</keyword>, advocating adoption of the calendar year as the accounting year. 
 
"With introduction of <a href="http://www.businessinsider.in/searchresult.cms?query=goods+and+service+tax&amp;sortorder=effectivedate">goods and service tax</a> (GST) later on in the year, it is possible that the new accounting year will come into being from January 2019 and not January 2,” it said.

Arun Jaitley may drop tough tax accounting rules in Budget 2017

One may argue, that when on 29 February 2016 the Finance Minister (FM) <keyword id="42575" type="PERSON" weightage="20" keywordseo="Arun-Jaitley">Arun Jaitley</keyword> will be presenting the General <keyword id="2783177" type="UNKNOWN" weightage="20" keywordseo="Budget-2016">Budget 2016</keyword> for the financial year 201-17, his job will be more difficult than what Manmohan Singh faced when he presented the ‘make-or-break’ budget in July 1991. For one, in 1991 there was an acknowledged economic crisis. Thus, there was a broader consensus on the likely course of action required to get India out of crisis. The doubt was whether India will bite the bullet or not. Well India did bite and Manmohan Singh was able to usher in liberalisation in India. 
 
In comparison, Mr. Jaitley has to deal with at least two sets of dilemma. Firstly, there is no consensus currently about the state of Indian economy. Secondly, there is uncertainty of whether sticking to the target of fiscal consolidation (3.9% Fiscal Deficit in FY16; 3.5 in FY17; 3.0 in FY18) as the FM targeted in the previous budget is the best course of action or not. 
 
Dilemma on the State of Economy: 
 
The expected FY16 real GDP growth of 7.6% (FY15:7.2%; FY14:6.6%) is among the best in the world, among the large global economies. Clearly the number does not look worrisome. But focus on aspects other than this number and one would come across the weakest corporate performance in a decade, a burgeoning bad debt problem in the banking system. And nominal GDP growth in FY16(estimated at 8.6%) is at least a decade low and showing a sequential decline over the previous three years(FY15: 10.8% ; FY14:13.3% ; FY13:13.9%). 
 
Incidentally, nominal GDP or the GDP calculated at current prices is the one which the participants in an economy experiences. The real GDP is the nominal GDP adjusted for, by a measure of systemic inflation known as GDP deflator. In the first three quarters of FY16 the GDP deflator has been either below 2% of has been below 0. If such GDP deflator values continue over the next few quarters’ Indian economy may be closing in on a deflationary scenario. Clearly, the real GDP growth may not be giving a cogent reading of the economy. Else what will explain the current clamour of industry bodies for growth measures (read government spending) from the government, in the current budget? 
 
No Small Nominal Headache: 
 
Why the FM will be particularly worried about the falling nominal GDP growth is because the fiscal deficit target is measured as a proportion of nominal GDP. When Mr. Jaitley presented the 2015-16 budget on 28th February 2015, he projected a fiscal deficit of INR 5.55 trillion (1 trillion is 1 Lakh crore). This was expected to be 3.9% of the then(as of Feb,2015) expected FY16 nominal GDP of INR 141 trillion. This is because the budget expected an 11.5% nominal GDP growth in 2015-16 over the then projected 2014-15 nominal GDP of INR126.5 trillion. 
 
Subsequently, the FY15 nominal GDP was re-estimated at a marginally lower INR 124.9 trillion and the FY16 nominal GDP growth is expected to be a decade low 8.6%. Even if the FY16 fiscal deficit remains at INR 5.55 trillion still under the recent nominal GDP estimates the fiscal deficit will be 4.1%, which may be construed as a slippage. 
 
Avoiding Fiscal Deficit slippage a Challenge 
 
Even in the current year (2015-16 ) if the government is to meet the 3.9% fiscal deficit target then the fiscal deficit has to be brought down by INR 200 billion to INR 5.34 trillion. That looks a bit far-fetched. 
 
How may 2016-17 fiscal deficit look like? Lets’ assume that the crude oil prices remain at current level and government continues to earn significant indirect tax by charging excise on petroleum products. The government may end up with incrementally spending approximately INR 1.2 trillion in lieu of higher salary of government employees as per 7th pay commission and to a lesser extent on One-Rank-One-Pension(OROP) scheme for soldiers. Since revenues are unlikely to go up commensurately one may realistically be looking at a fiscal deficit to the tune of INR 6-6.5 trillion. If FY17’s fiscal deficit target (3.5%) is to be met then the nominal GDP for FY17 needs to be to the tune of 20%, clearly that is not happening. 
 
Even if FY16’s target of 3.9% of fiscal deficit continues in FY17 then also a nominal GDP growth rate in excess of 10% needs to be assumed for the year FY17. Of course, this would mean an improvement in nominal GDP growth over FY16.While this is more plausible, the FM may face widespread criticism for slipping on the path of fiscal consolidation. This may adversely impact foreign investors particularly those invested in Indian fixed income securities. 
 
Damned if he Does, damned if he doesn’t: 
 
As such the FY16’s budget did not have too much spending in the nature of ‘government-growth-push’. This is reflected in the falling investment spend in the economy. As such major investments may not be expected from an over leveraged corporate sector, struggling with low capacity utilisation issues. If the FM decides to go for growth push spending along with the spending increases attributable to 7th pay commission and OROP the fiscal deficit will shoot up well over 4%. One is not sure, as to what extent it will scare global investors who may sell off on Indian securities, which may then weaken the Indian rupee. But clearly under such a scenario the government spending may not translate to a sharp improvement in growth. 
 
On the contrary, if the FM sticks of a fiscal deficit target of any number below 4%( but possibly higher than 3.5%) then government’s investment budget is likely to suffer. Such a move, while it will send a message of how determined the government is with respect to fiscal consolidation, may take a toll on growth. 
 
Clearly FY17’s budget would have challenged the best finance ministers India ever had. 
 
Deep Mukherjee was formerly senior director, Corporate Credit Rating at India Rating and Research, a Fitch Group company. He is currently a visiting faculty at IIM Calcutta.

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Arun Jaitley may drop tough tax accounting rules in Budget 2017

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Budget 2016: FM Jaitley may choose stability over growth!

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