The Hindu Business Line : Issues in cash-flow statement

Preparation of cash-flow statement will be difficult for a general taxpayer who must learn to distinguish capital expenditure from other expenditures. It needs to be simplified.

Generally, cash-flow statement reflects the extent of cash transactions made by an enterprise. For units engaged in business, the Institute of Chartered Accountants of India (ICAI) has prescribed Accounting Standard 3. The objective for prescribing cash-flow statement is to provide "users of financial statements with a basis to assess the ability of the enterprise to generate cash and cash equivalents and the needs of the enterprise to utilise those cash flows. The economic decisions that are taken by users require an evaluation of the ability of an enterprise to generate cash and cash equivalents and the timing and certainty of their generation."

Barring the words `cash equivalents', the `statement of objective' is comprehensible. The same Accounting Standard has defined the term `cash equivalents' as short term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value.

Cash management

The newly introduced Form No 2F in Schedule-5 seeks preparation of cash-flow statement by the taxpayers. The user obviously is the tax department. The purpose of the cash flow is to explain how the taxpayer has managed his cash resources during the previous year.

With the prescription of cash flow statement in the new income-tax return, the following issues arise:

The rationale of prescribing a format of presentation after the end of the previous year and the class of assessees who are covered by the new return form is debatable.

Most of these assessees are not obliged to maintain books of account but are now required to prepare the cash-flow statement for filing the return of income.

The press note says that for assessment year 2006-07, furnishing of cash-flow statement is optional. The return form is also meant for the assessment year 2006-07 only. The reason for giving a schedule in the return form for only one assessment year and making that schedule optional dilutes the intent and content of the return form prescribed.

Preparation of cash-flow statement will be difficult for a general taxpayer who must learn to distinguish capital expenditure from other expenditures. For the salaried class (for whom this return form is all the more applicable), understanding the conceptual difference between investment and expenditure has become imperative.

Some situations such as non-cash income liable to income-tax but not to be disclosed in the cash-flow statement can be visualised. For example, rent-free accommodation to the employee is a non-cash perquisite chargeable to tax as salary income but has no cash inflow to the assessee.

The cash-flow statement would reflect the aggregate of receipts which cannot be tallied with the income disclosed in Part B of the return.

Similarly, certain cash incomes are not liable to tax but have to be shown as inflow in the cash-flow statement. For the salaried class, they include transport, uniform, children's education and hostel allowances.

Tax deduction on salary under Section 192 — that is, whether the outgoings or the salary income net off tax is to be disclosed as receipt in the cash-flow statement — is yet another issue.

In the cash outflow, details of expenses or investment on which deduction under chapter VI-A are claimed, has to be disclosed. Whether the entire outflow or only the allowed portion needs to be disclosed is not known.

For example, in the case of housing loan, one is not sure whether only the principal to the extent allowed under Section 80-C limit is to be shown separately or even the (loan) repayment beyond the limit.

Whether housing loan interest is to be shown as "outgoings by way of other investments" or as "other outgoings" needs to be clarified.

The taxpayers cannot give any enclosures along with the return and, if given, "shall be returned by the official receiving the return". In the absence of explanatory annexures, the tax department too cannot check on the correctness of the cash-flow statement and gauge exactly the household drawings for detecting escapement or understatement of incomes.

It is also not clear whether bank fixed deposits are to be shown as bank balance on the closing date or as investment. Bank fixed deposits, being cash equivalents as per AS-3, may have to be aggregated with cash and bank balance.

However, for income-tax purposes, it may have to be shown as investment and only the balance in the current and savings bank accounts may be shown as bank balance for better understanding of cash-flow statement.

Simplification required

In its present format, the newly prescribed return form would burden the taxpayers. If continued for future assessment years, some amount of simplification may be required. And these could be by way of:

a) limiting the threshold limit for usingthe form only to large-income earners;

b) permitting enclosures or annexures along with the return; and

c) dispensing with the schedules to the return form and allowing the taxpayer to furnish those details in a format convenient to him.

Prescribing a (small) format and mandating disclosure therein without annexures would only put the taxpayers to greater hardship.

(The author is an Erode-based chartered accountant.)

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