Accounting for taxes on Accounting for taxes on income
income
Accounting Standard 22 Accounting Standard 22
Presented by Presented by : :
CA. Rajeev Bansal CA. Rajeev Bansal
ACA, D.I.S.A.(ICA) B. Com.
ACA, D.I.S.A.(ICA) B. Com.
M/s Rajeev Lakshmi Bansal & Co.
M/s Rajeev Lakshmi Bansal & Co.
Chartered Accountants
Chartered Accountants
Applicability Applicability
In respect of In respect of
All the companies. All the companies.
On or after 1-04-2006: - All other On or after 1-04-2006: - All other enterprises.
enterprises.
Scope Scope
Taxes covered Taxes covered
Taxes on income in India Taxes on income in India
Taxes on income overseas Taxes on income overseas
Dividend distribution tax not covered
Dividend distribution tax not covered
Recognition Recognition
Tax expense to be provided in the profit and loss Tax expense to be provided in the profit and loss account for the period not with respect to taxable account for the period not with respect to taxable income but with respect to accounting income as income but with respect to accounting income as
per matching concept.
per matching concept. i.e. i.e.
Taxes on income are considered Taxes on income are considered to be an expenseto be an expense incurred by the enterprises in earning income and incurred by the enterprises in earning income and are accrued in the same period as the revenue are accrued in the same period as the revenue and expenses to which they relate.
and expenses to which they relate.
(Para 10 of AS - 22) (Para 10 of AS - 22)
5
Difference Between Accounting and Difference Between Accounting and
Taxable Income Taxable Income
Timing differenceTiming difference
The differences between The differences between taxable and accounting taxable and accounting
income originating in one income originating in one
period and capable of period and capable of reversal in subsequent reversal in subsequent
period. For example, period. For example,
Different dep. RatesDifferent dep. Rates
Disallowances u/s 43B Disallowances u/s 43B
allowable on payment basis allowable on payment basis
Permanent DifferencesPermanent Differences
The differences between taxable The differences between taxable and accounting income
and accounting income
originating in one period and not originating in one period and not
capable of reversal in capable of reversal in
subsequent period. For example, subsequent period. For example,
Dividend income.Dividend income.
Weighted deduction allowed.Weighted deduction allowed.
Disallowance u/s 40A(3).Disallowance u/s 40A(3).
12/04/21 6
Tax Expense Tax Expense
It shall consist of :
Current tax - amount of income tax payable in respect of taxable income.
+
Deferred tax - tax effect of timing differences
Tax expense may result into tax saving as
well
Result of Timing Differences Result of Timing Differences
Deferred tax liability
Deferred tax liability-- When Book Income is When Book Income is MoreMore
oror
Deferred tax assets
Deferred tax assets--When Taxable Income When Taxable Income is Moreis More
Timing Differences Give Rise to Timing Differences Give Rise to
Deferred Tax Asset:Deferred Tax Asset:
Lower Tax depreciation Lower Tax depreciation (As Per I.T.)
(As Per I.T.)
43B disallowance43B disallowance
Loss Loss on on sale sale of of depreciable assets
depreciable assets
Loss/unabsorbed Loss/unabsorbed depreciation
depreciation
Provision for retirement Provision for retirement benefits allowable on benefits allowable on payment basis.
payment basis.
Diminution in value of Diminution in value of investment
investment
Payment Payment eligible eligible for for
deduction u/s
deduction u/s
35D/35DD, i.e. over a 35D/35DD, i.e. over a number of years
number of years
40(a) disallowance 40(a) disallowance
Deferred Tax Liability:Deferred Tax Liability:
Higher tax depreciation Higher tax depreciation (AS Per I.T.)
(AS Per I.T.)
Deferred Deferred revenue revenue expenditure, fully tax expenditure, fully tax deductible in current deductible in current yearyear
Profit Profit on on sale sale of of depreciable assets
depreciable assets
Permanent Difference Permanent Difference
No Treatment under AS 22No Treatment under AS 22
ExamplesExamples
Capital expenditure (non-depreciable).Capital expenditure (non-depreciable).
Personal expenditure.Personal expenditure.
Tax exemption u/s 10, 10A, 10B, etc.Tax exemption u/s 10, 10A, 10B, etc.
Tax deduction under chapter VI A.Tax deduction under chapter VI A.
Income tax/wealth tax.Income tax/wealth tax.
Disallowance u/s 40A(3).Disallowance u/s 40A(3).
Revaluation of income/write off.Revaluation of income/write off.
Delay in deposit of employee’s share in provident fund, etc.Delay in deposit of employee’s share in provident fund, etc.
12/04/21 10
Rationale Rationale
International practice International practice
Accrual Accrual
Matching Concept Matching Concept
Prudence Prudence
Example I
As Per As Per Tax Timing Permanent Books Computation Difference Difference
Profit before tax as 1000 1000 -- --
per P & L A/C
Dividend Income 100 ---- --- 100
--- --- 1100 1000 --- ---
Expenses 800 800
Depreciation 100 150 50
Unpaid Excise Duty 20 --- (-) 20
Provision For Gratuity 10 --- (-) 10
--- --- --- ---
930 950 20 100
--- --- --- ---
Profit Before Tax 170 50 100
Current Tax @40% -- 20 --
Deferred Tax on Timing Difference (+)20
@40% -- -- (-) 12
Tax Expense to be provided in (+)8
P & L A/C 28 -- ---
--- --- ---
Profit after tax 142 -- --
Example II Year Ending 31st Mar. 2004
As Per Books As Per Timing Computation Difference
Profit before dep.. & tax 200 200
Depreciation 50 150 (-)100
--- --- ---
Profit before tax 150 50
--- --- ---
Current Tax @40% ---- 20 ---
Deferred tax on timing difference --- --- 40 Tax Expense to be provided in
P & L A/C 60 --- ---
--- --- ---
Profit after tax 90 --- --
--- --- ---
CONTD…..
`
Example II Year Ending 31st Mar.2005
As Per As Per Timing Books Computation Difference
Profit before dep.. & Tax 200 200
Depreciation 50 --- 50
--- --- ---
Profit before taxes 150 200
--- --- ---
Current Tax @40% ---- 80 ---
Deferred Tax Liability
Reversed on timing difference @40% -- ---- (-)20
Tax expense to be provided in P & L A/c 60 --- ---- --- --- ---
Profit after tax 90 --- ----
--- --- ---
Unabsorbed depreciation and losses also timing Unabsorbed depreciation and losses also timing
differences differences
Unabsorbed depreciation and carry forward Unabsorbed depreciation and carry forward of losses which can be set off against future of losses which can be set off against future
taxable income are also considered as taxable income are also considered as
timing differences and result in deferred tax timing differences and result in deferred tax
assets, subject to consideration of assets, subject to consideration of
prudence.
prudence.
Concept of prudence Concept of prudence
Recognition and carry forward of deferred tax asset Recognition and carry forward of deferred tax asset only to the extent there is ‘
only to the extent there is ‘reasonable certaintyreasonable certainty”” that sufficient future taxable income will be available that sufficient future taxable income will be available
against which deferred tax asset can be realized.
against which deferred tax asset can be realized.
In case of unabsorbed depreciation or carry forward of In case of unabsorbed depreciation or carry forward of losses under tax laws, recognition if there is
losses under tax laws, recognition if there is ‘‘virtual virtual certainty with convincing evidences’
certainty with convincing evidences’, that , that sufficient future taxable income will be available sufficient future taxable income will be available against which deferred tax asset can be realized.
against which deferred tax asset can be realized.
(Para 17 of AS – 22) (Para 17 of AS – 22)
Reassessment of unrecognized deferred tax Reassessment of unrecognized deferred tax asset at each balance sheet date and review of asset at each balance sheet date and review of
deferred tax assets at each balance sheet date.
deferred tax assets at each balance sheet date.
Example III As Per Books As Per Tax Timing
Computation Difference
Profit as per P& L 1000 1000 -
Depreciation 400 1100 700
--- --- ---
Profit & loss 600 -100
--- --- ---
Current Tax @ 40% -- Nil --
Deferred Tax liability on
depreciation @40% -- -- 280
Deferred Tax Asset @40%
for unabsorbed depreciation -- -- (-)40
Tax expense @40% 240
--- --- ---
Profit after Tax 360 -- 240
--- --- ---
Example IV As Per Books As Per Timing Difference
Computation
Profit as Per P&L A/C 100 100 ---
Depreciation 400 1100 700
--- --- ---
Profit/Loss (-)300 (-)1000
--- --- ---
Current Tax ---- Nil ---
Deferred Tax liability ---- --- 280
Deferred Tax Asset --- ---- 400
Tax Saving 120 --- (120)
--- --- ---
Loss After Tax (-)180 -- --
--- --- ---
Measurement Measurement
Current TaxCurrent Tax-- Applicable rates and tax laws to Applicable rates and tax laws to be be adopted
adopted
Deferred TaxDeferred Tax-- Rates and tax laws that have Rates and tax laws that have been enacted or substantively
been enacted or substantively enacted by the enacted by the balance sheet
balance sheet date to be adopted.date to be adopted.
DiscountingDiscounting-- DTA and DTL discounting DTA and DTL discounting neither neither required nor
required nor permissible.permissible.
Review-Review-DTL and DTA to be restated DTL and DTA to be restated every year as every year as per applicable
per applicable ratesrates
Presentation and Disclosure Presentation and Disclosure
Netting of deferred tax assets and liabilities on Netting of deferred tax assets and liabilities on the face of Financial Statements.
the face of Financial Statements.
To be shown separately from current assets and To be shown separately from current assets and current liabilities in the balance sheet.
current liabilities in the balance sheet.
Breakup of deferred tax assets and liabilities into Breakup of deferred tax assets and liabilities into major components to be given in the notes to
major components to be given in the notes to accounts.
accounts.
Nature of evidences supporting the recognition if Nature of evidences supporting the recognition if deferred tax assets recognized in case of losses.
deferred tax assets recognized in case of losses.
12/04/21 20
1.1. When Financial Statements are Made on a When Financial Statements are Made on a
Date Other Than 31st March
Date Other Than 31st March
2. MAT Credit - whether DTA
2. MAT Credit - whether DTA
can be created can be created 3. In case DTA is not created - Whether 3. In case DTA is not created - Whether
AS-22 complied AS-22 complied 4. Whether for creating DTL - Principal of prudence 4. Whether for creating DTL - Principal of prudence may be applied.
may be applied.
5. Disallowances during 143(3) Assessment.
5. Disallowances during 143(3) Assessment.
6. ‘Recoverable’ word in definition of timing differences.
6. ‘Recoverable’ word in definition of timing differences.
7. Profit/ Loss on sale of Assets - Whether timing difference.
7. Profit/ Loss on sale of Assets - Whether timing difference.
Certain Issues
Certain Issues
Accounting Standard 22-impact Accounting Standard 22-impact
1.1. Impact on dividend paying capacity.Impact on dividend paying capacity.
2.2. Impact on net worth/ debt equity ratio Impact on net worth/ debt equity ratio /current ratio for fund raising.
/current ratio for fund raising.
3. DTL not part of reserves/ Net worth.
3. DTL not part of reserves/ Net worth.
Impact on Dividend Paying Impact on Dividend Paying
Capacity Capacity
A company has a profit of Rs. 100 crores A company has a profit of Rs. 100 crores before tax. Its current tax expense is Rs.
before tax. Its current tax expense is Rs.
35 crores and deferred tax expense is 35 crores and deferred tax expense is
Rs. 70 crores. Can the company declare Rs. 70 crores. Can the company declare
a dividend out of its profit for the current a dividend out of its profit for the current year year
? ?
12/04/21 22
Impact on Earning Per share Impact on Earning Per share
The company has incurred a loss of Rs. 2,00,000 in The company has incurred a loss of Rs. 2,00,000 in the year 2006 and made profit of Rs. 80,000 and the year 2006 and made profit of Rs. 80,000 and 1,40,000 in year 2007 and year 2008 respectively.
1,40,000 in year 2007 and year 2008 respectively.
Assuming Tax rate is 35%. The average No. of Assuming Tax rate is 35%. The average No. of equity shares outstanding as at the year end 2006 equity shares outstanding as at the year end 2006 is 10,000. What is the basic earning/loss per share is 10,000. What is the basic earning/loss per share
in 2006 :- in 2006 :-
Rs. 13 orRs. 13 or
Rs. 20.Rs. 20.
12/04/21
? ?
2312/04/21 24
ASIs in respect of AS 22 ASIs in respect of AS 22
ASI 3 -ASI 3 - Accounting for taxes on income Accounting for taxes on income in in situations of tax holidays u/s
situations of tax holidays u/s 80IA & 80IB80IA & 80IB
ASI 4-ASI 4- Losses under the head Capital Losses under the head Capital GainsGains
ASI 5-ASI 5- Accounting for taxes on income Accounting for taxes on income in in situations of tax holidays u/s
situations of tax holidays u/s 10A & 10B10A & 10B
``
ASI 6-ASI 6- Accounting for taxes on income Accounting for taxes on income in in context of s. 115JB
context of s. 115JB
25
ASIs in respect of AS 22 ASIs in respect of AS 22
ASI 7 -
ASI 7 - Disclosure of DTA and DTL in the Disclosure of DTA and DTL in the balance sheet of the company
balance sheet of the company ASI 9-
ASI 9- Virtual certainty supported by Virtual certainty supported by evidence
evidence ASI 11-
ASI 11- Accounting for taxes on income Accounting for taxes on income in case of amalgamation
in case of amalgamation
