Accounting Standard (AS)-22 Accounting for Taxes on income prescribe accounting treatment for taxes on income. Taxes on income is one of the significant items in the statement of profit and loss of an enterprises. In accordance with the matching concept, taxes on income are accrued in the same period as the revenue and expenses to which they relate. Matching of such taxes against revenue for a period poses special problem arising from the fact that in number of cases, taxable income may be significantly different from accounting income.
Definitions
- 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.
- 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.
- 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.
- Current tax is the amount of income tax determined to be payable (recoverable) in respect of the taxable income (tax loss) for a period.
- Deferred tax is the tax effect of timing differences.
- Timing differences are thee 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.
- Permanent differences are the differences between taxable income and accounting income for a period that originate in one period and do not reverse subsequently.
The differences between taxable income and accounting income can be classified into permanent differences and timing differences. Permanent differences are those differences between taxable income and accounting income that originate in one period and do not reverse subsequently. For instance, if for the purpose of computing taxable income, the tax laws allow only a part of an item of expenditure, the disallowed amount would result in a permanent difference. Permanent differences do not result in deferred tax assets or deferred tax liabilities.
Timing difference are the difference between taxable income and accounting income for a period that originate in one period and are capable of reversal in one or subsequent periods. For instance, machinery purchased for scientific research related to business is fully allowed as a deduction in the first year for tax purposes whereas the same would be charged to the statement of profit and loss as depreciation over its useful life.
Unabsorbed depreciation and carry forward of losses which can be set off against future taxable income as considered as a timing differences and result in deferred tax assets in a period
Deferred tax assets should be recognised and carry 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 realised.
Measurement:
Deferred tax assets and liabilities should be measured using the tax rates and the tax laws that have been enacted by the balance sheet date.
In a period in which a company pays tax under section 115JB of the Act, the deferred tax assets and liabilities in respect of timing differences arising during the period , tax effect of which is required to be recognised under this standard , is measured using the regular tax rates and not the tax rate under section 115JB of the Act.
Explanation:
- The deferred tax in respect of timing differences which reverse during the tax holiday period is not recognised to the extent the enterprise’s gross total income is subject to the deduction during the tax holiday period as per requirement u/s 80IA.
- Deferred tax in respect of timing differences which reverse after the tax holiday period is recognised in the year in which the timing difference originate.
- For the above purposes, the timing difference which originate first are considered to reverse first.
Illustration –
Computation of timing differences (80IA)
Amount in lakhs
1 |
2 |
3 |
5 |
6 |
7 |
8 |
9 |
Year |
Depreciation for Tax purposes |
Depreciation for Accounting purposes |
Timing differences |
Timing differences after adjustment |
Cumulative timing differences after adjustment |
Deferred Tax (Timing Differences * 30% |
Accumulated Deferred Tax |
1 |
375 |
100 |
275 |
47 |
47 |
47*30% = 14 (L) |
14 (L) |
2 |
281 |
100 |
181 |
181 (O) |
228 |
181*30% = 54 (L) |
68 (L) |
3 |
211 |
100 |
111 |
111 (O) |
339 |
111*30% = 33 (L) |
101 (L) |
4 |
158 |
100 |
58 |
58 (O) |
397 |
58*30%= 17 (L) |
118 (L) |
5 |
119 |
100 |
19 |
19( O) |
416 |
19*30% = 6 (L) |
124 (L) |
6 |
89 |
100 |
-11 |
-11 (R) |
416 |
Nil |
124 (L) |
7 |
67 |
100 |
-33 |
-33 (R ) |
416 |
Nil |
124 (L) |
8 |
50 |
100 |
-50 |
-50 (R ) |
416 |
Nil |
124 ( L) |
9 |
38 |
100 |
-62 |
-62 (R ) |
416 |
Nil |
124 (L) |
10 |
28 |
100 |
-72 |
-72 (R ) |
416 |
Nil |
124 (L) |
11 |
21 |
100 |
-79 |
-79 (R) |
337 |
79*30% = 24 (A) |
100 (L) |
12 |
16 |
100 |
-84 |
-84 ( R) |
253 |
84*30% = 25 (A) |
75 ( L) |
13 |
12 |
100 |
-88 |
-88 ( R) |
165 |
88*30% = 26 (A) |
49 (L) |
14 |
9 |
100 |
-91 |
-91 (R ) |
74 |
91*30% = 27 (A) |
22 (L) |
15 |
7 |
100 |
-93 |
-93 (R ) |
-19 |
19*30% = 6 (A) |
16 (L ) |
In this, 80IA selected from year 1 to 10 and reversal of timing differences during this period is Rs. 228 which got adjusted in year 1 (275-228 = 47)
Computation of timing differences
a. Expenditure of the nature mentioned in section 43B (eg. Taxes, duty, cess, fees, etc.) accrued in the statement of profit and loss but allowed for tax purposes in subsequent years on payment basis.
b. Payment to non residents accrued in the statement of profit and loss on mercantile basis, but disallowed for tax purposes under section 40(a)(i) and allowed for tax purposes in subsequent years when relevant tax is paid.
c. Provision made in the statement of profit and loss account in anticipation of liabilities where relevant liabilities are allowed in subsequent years when they crystallize.
d. Where book and tax depreciation differ.
Illustration on account of depreciation difference
| Particulars | FY 14 | FY 15 | FY 16 |
| PBT | 100 | 100 | 100 |
| Deprecation as per books | 33 | 33 | 33 |
| Profit under books | 67 | 67 | 67 |
| Deprecation under IT | 50 | 50 | – |
| Profit under Tax | 83 | 83 | 133 |
| Current Tax @ 30% | 25 | 25 | 40 |
| (83*30%) | (83*30%) | (133*30%) |
Therefore in FY 14 & FY 15 Deferred Tax Liability of Rs. 5 ((50-33)*30%) is to be crated which will get reverse in FY 16.
Following entries are to be passed.
In FY 14
Income Tax (P &L) A/c Dr. 25
To Income Tax payable (B/S) A/c 25
Deferred Tax (P &L) A/c Dr. 5
To Deferred Tax Liability (B/S ) 5
In FY 15
Income Tax (P &L) A/c Dr. 25
To Income Tax payable (B/S) A/c 25
Deferred Tax (P &L) A/c Dr. 5
To Deferred Tax Liability (B/S ) 5
In FY 16
Income Tax (P &L) A/c Dr. 40
To Income Tax payable (B/S) A/c 40
Deferred Tax Assets (B/S) A/c Dr. 10
To Deferred Tax Liabilities 10.
Deferred tax assets and liabilities should not be discounted to their present value.
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 deferred tax assets to the extent that it is no longer reasonably certain or virtually certain that sufficient future taxable income will be available against which deferred tax assets can be realised.
Presentation and Disclosure
Deferred tax assets is disclosed on the face of the balance sheet separately after the head ‘Investment’ and deferred tax liabilities is disclosed on the face of the balance sheet separately after the head ‘Unsecured loans’
Author Bio
Very Nice Article.. !!! –
Thanks
CA. Vidhyut Jain