Income Computation and Disclosure Standards (ICDS) are ten standards notified under Section 145(2) that govern the computation of income under 'Profits and gains of business or profession' and 'Income from other sources' for taxpayers following the mercantile system. They apply for tax computation only, not for maintaining books.
What ICDS are
ICDS standardise how income is computed for tax, independent of the accounting standards used in the books. They apply to all taxpayers (other than individuals/HUF not subject to tax audit) following the mercantile system. Where ICDS differ from book treatment, an adjustment is made in the computation of income and disclosed in Form 3CD.
The ten standards
| ICDS | Subject |
|---|---|
| I | Accounting policies |
| II | Valuation of inventories |
| III | Construction contracts |
| IV | Revenue recognition |
| V | Tangible fixed assets |
| VI | Effects of changes in foreign exchange rates |
| VII | Government grants |
| VIII | Securities |
| IX | Borrowing costs |
| X | Provisions, contingent liabilities and contingent assets |
Key adjustments ICDS create
- No recognition of expected losses or mark-to-market losses unless specifically permitted (ICDS I).
- Revenue and contract recognition broadly on the percentage-completion method (ICDS III/IV).
- Government grants generally taxed on receipt/accrual rather than deferred indefinitely (ICDS VII).
- Forex differences recognised per ICDS VI, which can differ from AS/Ind AS.
Compliance
Reconcile book profit to taxable income with an ICDS adjustment schedule, and disclose the net effect of each ICDS in Form 3CD (clauses 13(e)/(f)). Following the High Court rulings that struck down parts of ICDS as exceeding the Act, some provisions were amended by retrospective legislative change — verify the current position for contentious items.
Key takeaways
- ICDS: ten standards for computing taxable income (Section 145(2)).
- Apply to mercantile-basis business/other-source income, not books.
- No MTM/expected losses unless permitted; PoC for contracts/revenue.
- Net effect disclosed in Form 3CD.