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AS 22

ACCOUNTING FOR TAXES ON INCOME

~ RIDA TARANNUM SOGARA


Explanation:-

 Profit = Revenue – Expenses


 Tax = % Profit
 Revenue as stated in the Statement of Profit and Loss is not equal to the
Revenue considered for tax purposes.
 Expense as stated in the Statement of Profit and Loss is not equal to the
Expense considered for tax purposes.
 Hence, Profit varies
 Hence, Tax Varies
 i.e Tax paid as per IT Act is not equal to the tax that is accounted in the
books. This gives rise to deferred tax and to cover this lacuna we have AS 22.
 Therefore; we have AS 22 to prescribe the accounting treatment for taxes on
income.
Objective of AS 22

To prescribe accounting treatment for taxes on income.

To adhere to matching concept because accounting income is


significantly different from taxable income i.e there are
differences between items of revenue and expense as
appearing in the Statement of Profit and Loss and the items
which are considered as revenue, expenses or deductions for
tax purposes.
Definitions

 Accounting Income/ Loss:-


 It is the Net profit or loss for a period as reported in the statement of
profit and loss
 Taxable income /loss :-
 Amount of income or loss based on tax laws on the basis of which taxable
income is determined
 Tax Expense :-
 Aggregate of deferred tax and current tax
Definitions

 Current tax :-
 It’s the amount of income tax determined to be payable in respect of
taxable income or loss for a period

 Deferred tax :-
 It is the tax effect of timing difference

 Timing differences :-
 Differences between taxable income and accounting income which originate
in one accounting period and are capable of reversal in one or more
accounting periods.
Examples of Timing differences

 Difference in net block of fixed assets between tax and accounts :-


 Difference in Depreciation due to
 A. Different rates / methods
 B. Pro rata treatment Vs. 180 days (in I year)
 C. Up to Rs. 5000 assets write off under Companies Act
 D. Sale Proceeds Cr. to Block of Asset as per IT Act Vs. Profit / Loss on
sale of FA’s recognised in P&L A/c
Examples of Timing Differences

 Expenses Dr. to P & L A/c on accrual basis but allowed on


actual payment.
 Payments made without TDS, but disallowed for tax purposes
u/s 40(a)(i) / (ia) and allowed when relevant tax is deducted
& paid subsequently
 Expenditure U/s 43B of Income Tax Act
 Provisions made in the P&L A/c in anticipation of liabilities –
allowed when liabilities crystallize
Examples of Permanent differences
 Permanent differences :-

 Difference between taxable income and accounting income that originate


in one accounting period and that do not reverse subsequently.

 Cash Payments for revenue expenditure exceeding 20,000 are disallowed


u/s 40A(3). Such items will not be deductible in any period.

 Payment of remuneration to partners in excess of the remuneration


allowed by the partnership deed. Disallowed for tax purposes.

 Goodwill written off but not allowed as deductible expense.

 Contribution to unapproved Provident Funds/ Employee Welfare Funds.


Recognition

 Tax expense shall be included in determining net profit or


loss for the period .

 Tax Expenses = Current tax + Deferred tax

 Deferred tax should be recognised for all timing differences

 Permanent differences do not result in deferred tax.


Timing Difference ~ DTA/DTL

 Example :- Tax calculated on Accrual basis = 18,000

 Tax paid as per Tax Laws = 10,000

 Current Tax = 10,000


 Deferred Tax( Balance) = 8,000

 Tax Expense = Current Tax +/- Deferred tax = > 10,000 + 8,000.
Example – is 8,000 Deferred Tax
Asset or Deferred Tax Liability ?

 Accounting tax = 18,000


 Tax payable = 10,000

 8,000 will also have to be paid in future.

 Hence , a Deferred Tax Liability.


Continuing the same example:-

 Suppose; accounting tax is 10,000


 Tax Paid = 18,000

 It means higher tax is paid during the Current Year whose


benefit will be derived in future and hence a Deferred Tax
Asset.
DTA vs DTL

 Accounting Income > Taxable Income ~ Create DTL

 Accounting Income < Taxable Income ~ Reversal of DTL


or Creation of DTA

 Accounting Income = Taxable Income ~ No DTA or DTL


Measurement

 Current tax should be paid at amount expected to be paid to taxation


authorities

 Deferred tax assets or liabilities should be measured using tax rates


and tax laws that have been enacted or substantively enacted by the
balance sheet date.

 Deferred tax assets and liabilities should not be discounted to their


present value.
 Review of Deferred Tax :- It shall be reviewed at each balance sheet
date.
Review of Deferred Tax Assets

 The carrying amount of Deferred Tax Assets should be


reviewed at each balance sheet date.
 An enterprise should write down the carrying amount of a
deferred tax asset to the extent that it is no longer
reasonably certain or virtually certain as the case may be
that sufficient future taxable income will be available
against which deferred tax asset can be realised.
 Any write down may be reversed to the extent that it
becomes reasonably certain or virtually certain that
sufficient future taxable income will be available.
Financial Implication of Deferred
Tax:
 Effect of Deferred tax on Income Tax
 Effect on Current Ratio
 Affects Net Worth – Thereby affecting
 Limits under the Companies Acceptance of Deposits Rules
 - Eligibility to make investments
 -Affects Debt -Equity Ratio and TOL / TNW
 ~Affects Net Profit Ratio (PAT/Net Sales)
 ~ Affects EPS
 ~Affects Dividend declaration - No specific reference in
 the Company Law on DT.
Presentation and Disclosure

 An enterprise should offset deferred tax assets and deferred


tax liabilities if :-

 A. Enterprise has a legally enforceable right to set off assets


against liabilities representing current tax
 B. Deferred tax assets and deferred tax liabilities relate to
taxes on income levied by the same governing taxation laws.
Disclosure

 Break-up of major components of DTA / DTL to be


disclosed.

 DTA and DTL to be set off if permissible under tax laws but
to be shown separately otherwise.

 Evidence supporting the recognition of DTA to be disclosed


i.e if an enterprise has Unabsorbed Depreciation / Tax Losses
to be carried forward
Illustration :-

P Ltd has provided depreciation as per accounting records of


8,00,000 and as per Tax records it is 14,00,000. Unamortised
Preliminary Expenses as per Tax records is 11,200. There is
adequate evidence of profit sufficiency. How much DTA/DTL
should be recognised ? Tax rate is 40%
Solution:-
Item Amount Net Nature of Treatment DTA/DTL
Amount Difference @40% of
diff
1.Depreciation
Add: As per
Books 8,00,000 Timing Create DTL (2,40,000)
Less: Under (14,00,000) (6,00,000)
Income tax
Rules
2.Preliminary
Expenses
Add: Debit as 11,200 11,200 Timing Create DTA 4,480
per Books Nil
Less: C/F as per
Income tax act
Total Deferred
tax (2,35,520)
asset/(liability)
Explanations :-

 Depreciation:- In the current year; extra depreciation has


been claimed as per the Income tax rules. In the future
years; this will be offset by lower depreciation under Income
Tax Rules. Therefore, there will be increased tax obligation
in the future years. Hence, DTL should be created.

 Preliminary Expenses:- Unamortised preliminary expenses


can be adjusted or reduced against taxable income of future
years, leading to tax savings/benefit. Hence, deferred tax
asset should be created.
Wishes to all my fellow
aspirants

If you want to know where your


FUTURE is held
Look at your today’s ROUTINE
and Invest in the best.
THANK YOU.

Rida Tarannum Sogara


Intern @ Ernst Young; Chennai