AS-22 ACCOUNTING FOR TAXES ON INCOME
a) Mandatory w.e.f. 1-04-2001 in respect of the following:
1.Enterprises whose equity or debt securities are listed on a recognized stock exchange in India;
2.All the enterprises of a group, if the parent presents consolidated financial statements.
b) Mandatory w.e.f. 1.04.2002, in respect of companies not covered by a);
c) Mandatory w.e.f. 1.04.2006 in respect of all other enterprises.
Accounting income (loss) is the net profit or loss for a period, as reported in the statement of profit and loss, before deducting income tax expense or adding income tax saving. (i.e. PBT as per P/L A/c)
Taxable income (tax loss) is the amount of income (loss) for a period, determined in accordance with the tax laws, based upon which income tax payable (recoverable) is determined. (i.e. GTI)
Tax expense (tax saving) is the aggregate of current tax and deferred tax charged or credited to the statement of profit and loss for the period. (i.e. tax which is to be debited or credited to P/L A/c).
Current tax is the amount of income tax determined to be payable (recoverable) in respect of the taxable income (tax loss) for a period. (i.e. tax as per Income tax Act)
Deferred tax is the tax effect of timing differences. Model journal entries to be passed in books of account should be as under:
Current Tax A/c ………..Dr
To Provision for Current Tax
Deferred Tax A/c ………Dr
To Deferred Tax Liability A/c
Deferred Tax Assets A/c …….Dr
To Deferred Tax A/c
Tax Expense A/c……Dr
Deferred Tax A/c……Dr (In case DTA is created)
To Current Tax A/c
To Deferred Tax A/c (In case DTL is created)
To Current Tax A/c
Permanent differences are the differences between taxable income and accounting income for a period that originate in one period and do not reverse subsequently.
- Expenditure disallowed as per Income Tax Act (Forever)
- Excess expenditure allowed by Income Tax Act, 1961 in respect of Scientific Expenditure
Timing differences are the differences between taxable income and accounting income for a period that originate in one period and are capable of reversal in one or more subsequent periods.
- Depreciation rate/method different as per Accounts and Income tax Calculation
- Expenditure of the nature mentioned in Section 43B (e.g. sales tax charged in account on accrual basis but not paid;
such sales tax will be an allowable expenditure in the year of payment and a disallowable expenditure in the year in which accrued).
Hints for creation of DTL or DTA
When accounting profit/ loss is higher than taxable profit/loss: Deferred Tax liability is created or Deferred tax asset is reversed.
When accounting profit/loss is less than taxable profit/loss: Deferred tax asset is created or Deferred Tax Liability is reversed.
When taxable loss is carried forward for set off: Deferred Tax Asset is created.
When carried forward taxable loss is set off : Deferred Tax Asset is reversed.
However, Deferred Tax Asset (DTA) should be recognized and carried forward only to the extent that there is a reasonable certainty that sufficient future taxable income will be available against which such deferred tax assets can be reversed/ realized.
Example: Deferred Tax Asset should be created in respect of taxable loss being carried forward, when there is reasonable certainty that carried forward taxable loss will be set off. (i.e. Adequate taxable profit is expected in future)
The carrying amount of deferred tax assets should be reviewed at each balance sheet date. An enterprise should write down the carrying amount of deferred tax asset to the extent that it is no longer reasonably certain that sufficient profits will be available.
Such, written down value can be re-stated if it becomes virtually certain that sufficient profits will be available (for set off).
Also at each balance sheet date, an enterprise re-assesses unrecognized deferred tax assets. The enterprise recognizes previously unrecognized deferred tax assets to the extent that it has become reasonably certain that sufficient future taxable income will be available against which such deferred tax assets can be realized.
Presentation & Disclosure
In the Balance Sheet, a Deferred Tax Asset should be shown after the head “INVESTMENT” and Deferred Tax Liability should be shown after the head “UNSECURED LOAN”.
Current Tax assets and liabilities should be separately shown with Deferred Tax assets and liabilities.
Deferred Tax asset is set-off with deferred tax liabilities when
- the enterprise has a legally enforceable right to set-off assets against liabilities representing current tax; and
- the deferred tax assets and the deferred tax liabilities relate to taxes on income levied by the same governing taxation laws.
The nature of the evidence supporting the recognition of deferred tax assets should be disclosed, if an enterprise has unabsorbed depreciation or carry forward of losses under tax laws.