New Delhi, Feb. 23 -- India is preparing to merge its diverging tax and financial reporting frameworks into a unified system, two people aware of discussions said, in a move aimed at dismantling one of the most cumbersome hurdles for corporate India. The overhaul seeks to harmonize the Indian Accounting Standards (IndAS)-used for shareholder reporting-with the Income Computation and Disclosure Standards (ICDS) mandated by tax authorities. If successful, this would represent the most significant structural shift in the nation's accounting landscape since IndAS was first adopted in 2016. The move is significant because tax accounting standards, called the ICDS, issued by the Income Tax department and the Indian Accounting Standards or IndAS, notified by the ministry of corporate affairs follow different accounting principles. IndAS aims to capture the economic position of a company at a given point in time using fair valuation of assets and liabilities, an approach useful for investors. Tax accounting norms, on the other hand, generally rely more on realised income and verifiable transactions, since gains or losses from mere price fluctuations in unsold assets may never materialise. ICDS does not affect book profits or increase overall tax liability over time, but it limits the flexibility to defer tax to a later year. Under IndAS, mark-to-market gains or losses are recognised, for example, in the case of financial instruments, but ICDS typically prefers assets to be shown at the historical cost of acquisition to reduce volatility in tax computation. Valuation changes According to Amit Maheshwari, managing partner at AKM Global, a tax and consulting firm, the integration will benefit in three ways: a single framework, a lower compliance burden, reduced litigation, and cleaner tax reporting. "Companies will no longer maintain dual computations-IndAS for financials and ICDS for tax. It will help in significantly reducing reconciliations, compliance time and advisory costs," said Maheshwari. "Many tax disputes arise from differences between IndAS and ICDS on revenue, provisions, exchange gain/loss, and contracts. Harmonisation will narrow these gaps and improve certainty in tax outcomes," explained Maheshwari. With ICDS embedded into IndAS, deferred tax computation and year-end tax reconciliations may become simpler and more predictable, Maheshwari added. The move to integrate ICDS with IndAS will help both the taxpayers as well as the tax administration, said Ved Jain, former president of the Institute of Chartered Accountants of India (ICAI). "Where there is no difference between ICDS and IndAS, there is no issue. Where there are differences, either ICDS may be modified to align with IndAS, or IndAS may be amended, or, where neither is possible, reconciliation may be required. Amending IndAS may not be easy as it is aligned with International Financial Reporting Standards, given the need for Indian companies' financial statements to be globally comparable," said Jain. However, the outcome of the proposed integration of accounting standards will depend on the extent to which IndAS gets overridden by ICDS when the two are merged, said one of the two persons quoted above. "The integration of the two accounting standards will certainly be beneficial to professionals and the industry. However, the benefits will be comprehensive only if ICDS provisions do not override IndAS concepts and provisions in a big way," said the person quoted above. That will depend on how these two are merged. The ministry of corporate affairs and the Central Board of Direct Taxes (CBDT) are in the process of setting up a committee for integrating the two standards as announced in the union budget for fiscal year 2027 (FY27), to be effective from tax year 2027-28, that is, for reporting income earned in FY27. IndAS often uses fair value or market-based values, while ICDS prefers historical or original cost. These two approaches can be merged because IndAS already allows both methods in different situations, said Maheshwari. "To combine them within one framework, the Joint Committee can keep IndAS financial statements as they are, but add 'tax rules' inside IndAS itself," he said. Instead of maintaining a separate ICDS, IndAS can include small tax-specific sections saying: 'For tax purposes, use cost instead of fair value in this situation,' or 'For tax, recognise income only when realised,' explained Maheshwari. The Companies Act requires listed entities and unlisted entities with a net worth of Rs.250 crore or more, and their associates, to follow IndAS, which is based on the 'fair value' concept, from April 2017. ICDS notifications so far ensure that, no matter which accounting standard companies follow or the flexibility they exercise, the tax outgo will be the same across the industry....