Preamble:

The Taxation Laws (Amendment) Ordinance, 2019 (or ’the Ordinance’)  was passed by Lok Sabha on December 2, 2019. The Ordinance provides significant tax cuts to Domestic companies.  This article specifically enlightens the treatment of the same in Books of Account of the assessee taking benefit of the ordinance.

Pursuant of the ordinance, Ind AS Technical Facilitation Group has provided clarification via Bulletin 23.

Issue 1:

Company X has an asset of Base Rs 100 on which DTL is created @ 30%* (old rate) = Rs 30. As on 31-03-2019.

For the purpose of ease of calculation, Basic tax rate has been considered

It is expected that the base for the same asset will be as follows:

F.Y. Asset Base at the end of year
2019-20 90
2020-21 80
2021-22 70
2022-23 60
2023-24 50
2024-25 40
2025-26 30
2026-27 20
2027-28 10
2028-29 0

Now suppose the  company decided to opt for lower tax rate from F.Y. 2022-23 (This decision may be due to huge MAT Credit availability or any other available profit linked deduction)

How the treatment shall be given to such decision into books of Accounts?

Ans 1 :

The given below table shows the treatment :

F.Y.

Asset Base at the end of year Total DTL arising out of the asset at the end the period

Net effect

2018-19 100 100*30%=30 -30
2019-20 90 (30*30%)  +  (60*15%)=18 +12
2020-21 80 (20*30%)   +   (60*15%)=15 +3
2021-22 70 (10*30%)  +  (60*15%)=12 +3
2022-23 60 (0*30%)  +  (60*15%)=9 +3
2023-24 50 (0*30%)  +  (50*15%)=7.5 +1.5
2024-25 40 (0*30%)  +  (40*15%)=6 +1.5
2025-26 30 (0*30%)  +  (30*15%)=4.5 +1.5
2026-27 20 (0*30%)  +  (20*15%)=3 +1.5
2027-28 10 (0*30%)  +  (10*15%)=1.5 +1.5
2028-29 0 (0*30%)  +  (0*15%)=0 +1.5
Total 0

Reason for such Treatment:

Paragraphs 46, 47 and 51 of Ind AS 12, Income Taxes, state as follows:

“46) Deferred tax assets and liabilities shall be measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period.

 47) Deferred tax assets and liabilities shall be measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period.”

51) The measurement of deferred tax liabilities and deferred tax assets shall reflect the tax consequences that would follow from the manner in which the entity expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities”

Accordingly, DTA/DTL shall be created at the Tax Rate at which such Asset or liability is likely to be realized or settled.

Issue 2:

Another question which arises is that where the effect of change in Deferred tax Amount should be given due to change in Tax rate.

Ans 2:

Case 1 : Underlying Item is part of Equity

In such case, Impact of Deferred tax is to be recognized  in Equity

Case 2 : Underlying Item is part of Other comprehensive income

In such case, Impact of Deferred tax is to be recognized in Other comprehensive income

Case 3 : Underlying Item is part of Profit & loss statement

In such case, Impact of Deferred tax is to be recognized in Profit & loss statement

Reason for the treatment:

Paragraph 57 of Ind AS 12, Income Taxes, lays down the principle for accounting of current and deferred tax effects, “Accounting for the current and deferred tax effects of a transaction or other event is consistent with the accounting for the transaction or event itself….” Ind AS 12, further states the following with regard to where in the financial statements (i.e., in profit or loss, in other comprehensive income, or directly in equity) should the current and deferred tax be recognised:

 “58 Current and deferred tax shall be recognised as income or an expense and included in profit or loss for the period, except to the extent that the tax arises from:

(a) a transaction or event which is recognised, in the same or a different period, outside profit or loss, either in other comprehensive income or directly in equity (see paragraphs 61A -65); or

(b) a business combination (other than the acquisition by an investment entity, as defined in Ind AS 110, Consolidated Financial Statements, of a subsidiary that is required to be measured at fair value through profit or loss) (see paragraphs 66 -68).”

“60  The carrying amount of deferred tax assets and liabilities may change even though there is no change in the amount of the related temporary differences. This can result, for example, from:

(a) a change in tax rates or tax laws;

 The resulting deferred tax is recognised in profit or loss, except to the extent that it relates to items previously recognised outside profit or loss. “

“61A Current tax and deferred tax shall be recognised outside profit or loss if the tax relates to items that are recognised, in the same or a different period, outside profit or loss. Therefore, current tax and deferred tax that relates to items that are recognised, in the same or a different period:

(a) in other comprehensive income, shall be recognised in other comprehensive income (see paragraph 62).

(b) directly in equity, shall be recognised directly in equity (see paragraph 62A).”

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