Accounting Standards Board
The Institute of Chartered Accountants of India
12th May, 2021

Sub: Exposure Draft of Revised Accounting Standards for Public Comments

The Indian Accounting Standards (Ind AS), as notified by the Ministry of Corporate Affairs in February, 2015, and as amended from time to time are applicable to the specified class of companies as per Ind AS Roadmap. Accounting Standards notified under Companies (Accounting Standards) Rules 2006 and those issued by the ICAI are applicable to entities to whom Ind AS are not applicable. However, on the basis of the discussions held at various standard setting forums, such as, NACAS (now replaced by NFRA), Ministry of Corporate Affairs, and Accounting Standards Board (ASB) of ICAI, it has been decided to revise Accounting Standards (AS). Accordingly, ASB is working on the project of revision of these standards which will be applicable to entities to whom Ind AS are not applicable. While formulating these Accounting Standards, the ASB decided to maintain the consistency with the numbering of Standards of Ind AS numbering.

In this direction, the Exposure Draft of revised AS 12, Income Taxes, has been issued by the ASB for comments with the last date being June 10, 2021, which can be assessed at the below link: https://resource.cdn.icai.org/64776asb51975.pdf

Further, comments on the abovementioned Exposure Draft issued by the ASB may be submitted through any of the following modes.

1. Electronically: Click on http://www.icai.org/comments/asb/ to submit comment online (Preferred method)
2. Email: Comments can be sent to: [email protected]
3. Postal: Secretary, Accounting Standards Board,
The Institute of Chartered Accountants of India,
ICAI Bhawan, Post Box No. 7100,
Indraprastha Marg, New Delhi 110 002

Further clarifications on any aspect of this Exposure Draft may be sought by e-mail to [email protected].

Exposure Draft

Accounting Standard (AS) 12
Income Taxes

Last date for the comments: June 10, 2021

Issued by
Accounting Standards Board
The Institute of Chartered Accountants of India

Exposure Draft
Accounting Standard (AS) 12, Income Taxes

The Indian Accounting Standards (Ind AS), as notified by the Ministry of Corporate Affairs in February 2015, are applicable to the specified class of companies. Accounting Standards notified under Companies (Accounting Standards) Rules, 2006, and those issued by the ICAI are applicable to entities to whom Ind AS are not applicable. However, on the basis of the discussions held at various standard setting forums, such as, the Accounting Standards Board (ASB) of the Institute of Chartered Accountants of India (ICAI), NACAS1 and the Ministry of Corporate Affairs (MCA), it has been decided to revise the Accounting Standards. Accordingly, the Accounting Standards Board of ICAI has initiated the process of upgradation of these standards which will be applicable to the entities to whom Ind AS are not applicable. While formulating these Standards, it was decided to maintain the consistency with the numbering of Standards of the Ind AS.

In the above background, the ASB has finalised AS 12, Income Taxes, taking AS 22, Accounting for Income Taxes, notified by MCA as the base. Major differences between draft of revised AS 12 and Ind AS 12, Income Taxes, are included in the Appendix 1 of the Standard. Major differences between draft of revised AS 12 and AS 22 are given in Appendix 2 of the Standard.

This is the Exposure Draft of the revised Accounting Standard (AS) 12, Income Taxes, issued by the ASB, for comments. Revised AS 12 refers to provisions of various revised AS which are under formulation.

The ASB invites comments on any aspect of this Exposure Draft. Comments are most helpful if they indicate the specific paragraph or group of paragraphs to which they relate, contain a clear rationale and, where applicable, provide a suggestion for alternative wording.

How to Comment:

Comments can be submitted using one of the following methods so as to receive not later than June 10, 2021.

Electronically: click on http://www.icai.org/comments/asb/to submit comments online
Email: Comments can be sent at [email protected]
Postal: Secretary, Accounting Standards Board, The Institute of Chartered Accountants of India ICAI Bhawan, Post Box No. 7100, Indraprastha Marg, New Delhi – 110 002

Further clarifications on any aspect of this Exposure Draft may be sought by e-mail to [email protected]

Accounting Standard (AS) 12

Income Taxes

[This Accounting Standard includes paragraphs set in bold type and plain type, which have equal authority. Paragraphs in bold type indicate the main principles.]

Objective

The objective of this Standard is to 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 entity. 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 problems arising from the fact that in a number of cases, taxable income may be significantly different from the accounting income. This divergence between taxable income and accounting income arises due to two main reasons. Firstly, there are differences between items of revenue and expenses as appearing in the statement of profit and loss and the items which are considered as revenue, expenses or deductions for tax purposes. Secondly, there are differences between the amount in respect of a particular item of revenue or expense as recognised in the statement of profit and loss and the corresponding amount which is recognised for the computation of taxable income.

Scope

1. This Standard shall be applied in accounting for taxes on income. This includes the determination of the amount of the expense or saving related to taxes on income in respect of an accounting period and the disclosure of such an amount in the financial statements.

2. For the purposes of this Standard, taxes on income include all domestic and foreign taxes which are based on taxable income.

3. This Standard does not specify when, or how, an entity shall account for taxes that are payable on distribution of dividends and other distributions made by the entity.

Definitions

4. For the purpose of this Standard, the following terms are used with the meanings specified:

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 the 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 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.

Permanent differences are the differences between taxable income and accounting income for a period that originate in one period and do not reverse subsequently.

5. Taxable income is calculated in accordance with tax laws. In some circumstances, the requirements of these laws to compute taxable income differ from the accounting policies applied to determine accounting income. The effect of this difference is that the taxable income and accounting income may not be the same.

6. 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 which 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.

7. Timing differences are those 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. Timing differences arise because the period in which some items of revenue and expenses are included in taxable income do not coincide with the period in which such items of revenue and expenses are included or considered in arriving at accounting income. For example, machinery purchased for scientific research related to business is fully allowed as 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. The total depreciation charged on the machinery for accounting purposes and the amount allowed as deduction for tax purposes will ultimately be the same, but periods over which the depreciation is charged and the deduction is allowed will differ. Another example of timing difference is a situation where, for the purpose of computing taxable income, tax laws allow depreciation on the basis of the written down value method, whereas for accounting purposes, straight line method is used. Some other examples of timing differences arising under the Indian tax laws are given in Illustration 1.

8. Unabsorbed depreciation and carry forward of losses which can be set-off against future taxable income are also considered as timing differences and result in deferred tax assets, subject to consideration of probability (see paragraphs 15-19).

Recognition

9. Tax expense for the period, comprising current tax and deferred tax, shall be included in the determination of the profit or loss for the period.

10. Taxes on income are considered to be an expense incurred by the entity in earning income and are accrued in the same period as the revenue and expenses to which they relate. Such matching may result into timing differences. The tax effects of timing differences are included in the tax expense in the statement of profit and loss and as deferred tax assets (subject to the consideration of probability as set out in paragraphs 15-19) or as deferred tax liabilities, in the balance sheet.

11. An example of tax effect of a timing difference that results in a deferred tax asset is an expense provided in the statement of profit and loss but not allowed as a deduction under Section 43B of the Income-tax Act, 1961. This timing difference will reverse when the deduction of that expense is allowed under Section 43B in subsequent year(s). An example of tax effect of a timing difference resulting in a deferred tax liability is the higher charge of depreciation allowable under the Income-Tax Act, 1961, compared to the depreciation provided in the statement of profit and loss. In subsequent years, the differential will reverse when comparatively lower depreciation will be allowed for tax purposes.

12. Permanent differences do not result in deferred tax assets or deferred tax liabilities.

13. Deferred tax shall be recognised for all the timing differences, subject to the consideration of probability in respect of deferred tax assets as set out in paragraphs 15- 19.

Explanation:

(a) The deferred tax in respect of timing differences which reverse during the tax holiday period is not recognised to the extent the entity’s gross total income is subject to the deduction during the tax holiday period as per the requirements of sections 80IA/80IB of the Income-tax Act, 1961. In case of sections 10A/10B of the Income-tax Act, 1961 (covered under Chapter III of the Income-tax Act, 1961 dealing with incomes which do not form part of total income), the deferred tax in respect of timing differences which reverse during the tax holiday period is not recognised to the extent deduction from the total income of an entity is allowed during the tax holiday period as per the provisions of the said sections.

(b) Deferred tax in respect of timing differences which reverse after the tax holiday period is recognised in the year in which the timing differences originate. However, recognition of deferred tax assets is subject to the consideration of probability as laid down in paragraphs 15 to 19.

(c) For the above purposes, the timing differences which originate first are considered to reverse first.

The application of the above explanation is illustrated in the Illustration I attached to the Standard.

14. This Standard requires recognition of deferred tax for all the timing differences. This is based on the principle that the financial statements for a period shall recognise the tax effect, whether current or deferred, of all the transactions occurring in that period.

15. Deferred tax assets shall be recognised and carried forward only to the extent that it is probable that sufficient future taxable income will be available against which such deferred tax assets can be realised.

16. The reversal of timing differences results in deductions in determining future taxable income. However, economic benefits in the form of reductions in tax payments will flow to the entity only if it earns sufficient future taxable income against which the deductions can be offset. Therefore, an entity recognises deferred tax assets only when it is probable that future taxable income will be available against which the timing differences can be realised.

17. Where an entity has unabsorbed depreciation or carry forward of losses under tax laws, deferred tax assets shall be recognised only to the extent that it is probable that sufficient future taxable income will be available against which such deferred tax assets can be realised.

Explanation:

1. (a) As per the relevant provisions of the Income-tax Act, 1961, the ‘loss’ arising under the head ‘Capital gains’ can be carried forward and set-off in future years, only against the income arising under that head as per the requirements of the Income-tax Act, 1961.

(b) Where an entity’s statement of profit and loss includes an item of ‘loss’ which can be set-off in future for taxation purposes, only against the income arising under the head ‘Capital gains’ as per the requirements of the Income-tax Act, 1961, that item is a timing difference to the extent it is not set-off in the current year and is allowed to be set-off against the income arising under the head ‘Capital gains’ in subsequent years subject to the provisions of the Income-tax Act, 1961. In respect of such ‘loss’, deferred tax asset is recognised and carried forward subject to probability that sufficient future taxable income will be available against which such deferred tax assets can be realised. Accordingly, in respect of such ‘loss’, deferred tax asset is recognised and carried forward only to the extent that it is probable that sufficient future taxable income will be available under the head ‘Capital gains’ against which the loss can be set-off as per the provisions of the Income-tax Act, 1961. The examples of situations in which it is probable that sufficient future taxable income for the purposes of the recognition of deferred tax asset in respect of loss arising under the head ‘Capital gains’ is available, are sale of an asset giving rise to capital gain (eligible to set-off the capital loss as per the provisions of the Income-tax Act, 1961) after the balance sheet date but before the financial statements are approved, and binding sale agreement which will give rise to capital gain (eligible to set-off the capital loss as per the provisions of the Income-tax Act, 1961).

(c) In cases where there is a difference between the amounts of ‘loss’ recognised for accounting purposes and tax purposes because of cost indexation under the Income-tax Act, 1961 in respect of long-term capital assets, the deferred tax asset is recognised and carried forward (subject to the probability) on the amount which can be carried forward and set-off in future years as per the provisions of the Income-tax Act, 1961.

18. The criteria for recognising deferred tax assets arising from unabsorbed depreciation and carry forward of losses are the same as the criteria for recognising deferred tax assets arising from timing differences. However, the existence of unabsorbed depreciation or carry forward of losses under tax laws is strong evidence that future taxable income may not be available. Therefore, when an entity has a history of recent losses, the entity recognises deferred tax assets only to the extent that it has timing differences the reversal of which will result in sufficient income or there is other convincing evidence that sufficient taxable income will be available against which such deferred tax assets can be realised. In such circumstances, paragraph 33 requires disclosure of the amount and nature of the evidence supporting its recognition.

19. An entity considers the following criteria in assessing the probability that future taxable income will be available against which the unabsorbed depreciation or carry forward of losses under tax laws can be realised:

(a) whether the entity has sufficient taxable timing differences relating to the same taxation authority and the same taxable entity, which will result in taxable amounts against which the unabsorbed depreciation or carry forward of losses under tax laws can be utilised before they expire;

(b) whether it is probable that the entity will have future taxable income before the unabsorbed depreciation or carry forward of losses under tax laws expire;

(c) whether the unabsorbed depreciation or carry forward of losses under tax laws result from identifiable causes which are unlikely to recur; and

(d) whether tax planning opportunities are available to the entity that will create taxable profit in the period in which the unabsorbed depreciation or carry forward of losses under tax laws can be utilised.

To the extent that it is not probable that future taxable income will be available against which the unabsorbed depreciation or carry forward of losses under tax laws can be realised, the deferred tax asset is not recognised.

Re-assessment of Unrecognised Deferred Tax Assets

20. At each balance sheet date, an entity re-assesses unrecognised deferred tax assets. The entity recognises previously unrecognised deferred tax assets to the extent that it has become probable (see paragraphs 15 to 19), that sufficient future taxable income will be available against which such deferred tax assets can be realised. For example, an improvement in trading conditions may make it more probable that the entity will be able to generate sufficient taxable income in the future.

Measurement

21. Current tax shall be measured at the amount expected to be paid to (recovered from) the taxation authorities, using the applicable tax rates and tax laws.

22. Deferred tax assets and liabilities shall be measured using the tax rates and tax laws that have been enacted or substantively enacted by the balance sheet date.

Explanation:

(a) The payment of tax under section 115JB of the Income-tax Act, 1961 is a current tax for the period.

(b) In a period in which a company pays tax under section 115JB of the Income-tax Act, 1961, 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 Income-tax Act, 1961.

(c) In case an entity expects that the timing differences arising in the current period would reverse in a period in which it may pay tax under section 1 15JB of the Income-tax Act, 1961, the deferred tax assets and liabilities in respect of timing differences arising during the current period, tax effect of which is required to be recognised under AS 12, is measured using the regular tax rates and not the tax rate under section 1 15JB of the Income-tax Act, 1961.

23. Deferred tax assets and liabilities are usually measured using the tax rates and tax laws that have been enacted. However, certain announcements of tax rates and tax laws by the government may have the substantive effect of actual enactment. In these circumstances, deferred tax assets and liabilities are measured using such announced tax rate and tax laws.

24. When different tax rates apply to different levels of taxable income, deferred tax assets and liabilities are measured using average rates.

25. Deferred tax assets and liabilities should not be discounted to their present value.

26. The reliable determination of deferred tax assets and liabilities on a discounted basis requires detailed scheduling of the timing of the reversal of each timing difference. In a number of cases such scheduling is impracticable or highly complex. Therefore, it is inappropriate to require discounting of deferred tax assets and liabilities. To permit, but not to require, discounting would result in deferred tax assets and liabilities which would not be comparable between entities. Therefore, this Standard does not require or permit the discounting of deferred tax assets and liabilities.

Review of Deferred Tax Assets

27. The carrying amount of deferred tax assets should be reviewed at each balance sheet date. An entity shall write-down the carrying amount of a deferred tax asset to the extent that it is no longer probable (see paragraphs 15 to 19), that sufficient future taxable income will be available against which deferred tax asset can be realised. Any such write-down may be reversed to the extent that it becomes probable (see paragraphs 15 to 19), that sufficient future taxable income will be available.

Presentation and Disclosure

28. An entity shall offset assets and liabilities representing current tax if the entity:

(a) has a legally enforceable right to set off the recognised amounts; and

(b) intends to settle the asset and the liability on a net basis.

29. An entity will normally have a legally enforceable right to set off an asset and liability representing current tax when they relate to income taxes levied under the same governing taxation laws and the taxation laws permit the entity to make or receive a single net payment.

30. An entity shall offset deferred tax assets and deferred tax liabilities if:

(a) the entity has a legally enforceable right to set off assets against liabilities representing current tax; and

(b) the deferred tax assets and the deferred tax liabilities relate to taxes on income levied by the same governing taxation laws.

31. Deferred tax assets and liabilities shall be distinguished from assets and liabilities representing current tax for the period. Deferred tax assets and liabilities shall be disclosed under a separate heading in the balance sheet of the entity, separately from current assets and current liabilities.

32. The break-up of deferred tax assets and deferred tax liabilities into major components of the respective balances shall be disclosed in the notes to accounts.

33. The amount of deferred tax asset and nature of the evidence supporting its recognition shall be disclosed, if an entity has unabsorbed depreciation or carry forward of losses under tax laws.

Transitional Provisions

34. On the first occasion that the taxes on income are accounted for in accordance with this Standard the entity shall recognise, in the financial statements, the deferred tax balance that has accumulated prior to the adoption of this Standard as deferred tax asset/liability with a corresponding credit/charge to the revenue reserves, subject to the consideration of probability in case of deferred tax assets (see paragraphs 15-19). The amount so credited/charged to the revenue reserves shall be the same as that which would have resulted if this Standard had been in effect from the beginning.

35. For the purpose of determining accumulated deferred tax in the period in which this Standard is applied for the first time, the opening balances of assets and liabilities for accounting purposes and for tax purposes are compared and the differences, if any, are determined. The tax effects of these differences, if any, shall be recognised as deferred tax assets or liabilities, if these differences are timing differences. For example, in the year in which an entity adopts this Standard, the opening balance of a fixed asset is Rs. 100 for accounting purposes and Rs. 60 for tax purposes. The difference is because the entity applies written down value method of depreciation for calculating taxable income whereas for accounting purposes straight line method is used. This difference will reverse in future when depreciation for tax purposes will be lower as compared to the depreciation for accounting purposes. In the above case, assuming that enacted tax rate for the year is 40% and that there are no other timing differences, deferred tax liability of Rs. 16 [(Rs. 100 – Rs. 60) x 40%] would be recognised. Another example is an expenditure that has already been written off for accounting purposes in the year of its incurrence but is allowable for tax purposes over a period of time. In this case, the asset representing that expenditure would have a balance only for tax purposes but not for accounting purposes. The difference between balance of the asset for tax purposes and the balance (which is nil) for accounting purposes would be a timing difference which will reverse in future when this expenditure would be allowed for tax purposes. Therefore, a deferred tax asset would be recognised in respect of this difference subject to the consideration of probability (see paragraphs 15 – 19).

Illustration I

Examples of Timing Differences

Note: This illustration does not form part of the Accounting Standard. The purpose of this illustration is to assist in clarifying the meaning of the Accounting Standard. The sections mentioned hereunder are references to sections in the Income-tax Act, 1961, as amended from time to time.

1. Expenses debited in the statement of profit and loss for accounting purposes but allowed for tax purposes in subsequent years, e.g.

a) Expenditure of the nature mentioned in section 43B (e.g. taxes, duty, cess, fees, etc.) accrued in the statement of profit and loss on mercantile basis but allowed for tax purposes in subsequent years on payment basis.

b) Payments 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 deducted or paid.

c) Provisions made in the statement of profit and loss in anticipation of liabilities where the relevant liabilities are allowed in subsequent years for tax purposes when they crystallize.

2. Expenses amortized in the books over a period of years but are allowed for tax purposes wholly in the first year (e.g. substantial advertisement expenses to introduce a product, etc. treated as deferred revenue expenditure in the books) or if amortization for tax purposes is over a longer or shorter period (e.g. preliminary expenses under section 35D, expenses incurred for amalgamation under section 35DD, prospecting expenses under section 35E).

3. Where book and tax depreciation differ. This could arise due to:

a) Differences in depreciation rates.

b) Differences in method of depreciation e.g. SLM or WDV.

c) Differences in method of calculation e.g. calculation of depreciation with reference to individual assets in the books but on block basis for tax purposes and calculation with reference to time in the books but on the basis of full or half depreciation under the block basis for tax purposes.

d) Differences in composition of actual cost of assets.

4. Where a deduction is allowed in one year for tax purposes on the basis of a deposit made under a permitted deposit scheme (e.g. tea development account scheme under section 33AB or site restoration fund scheme under section 33ABA) and expenditure out of withdrawal from such deposit is debited in the statement of profit and loss in subsequent years.

5. Income credited to the statement of profit and loss but taxed only in subsequent years e.g. conversion of capital assets into stock in trade.

6. If for any reason the recognition of income is spread over a number of years in the accounts but the income is fully taxed in the year of receipt.

Note: This illustration does not form part of the Accounting Standard. Its purpose is to illustrate the application of the Accounting Standard. Extracts from statement of profit and loss are provided to show the effects of the transactions described below.

Illustration II

Illustration 1

A company, ABC Ltd., prepares its accounts annually on 31st March. On 1st April, 20×1, it purchases a machine at a cost of Rs. 1,50,000. The machine has a useful life of three years and an expected scrap value of zero. Although it is eligible for a 100% first year depreciation allowance for tax purposes, the straight-line method is considered appropriate for accounting purposes. ABC Ltd. has profits before depreciation and taxes of Rs. 2,00,000 each year and the corporate tax rate is 40 per cent each year.

The purchase of machine at a cost of Rs. 1,50,000 in 20×1 gives rise to a tax saving of Rs. 60,000. If the cost of the machine is spread over three years of its life for accounting purposes, the amount of the tax saving should also be spread over the same period as shown below:

Statement of Profit and Loss
(for the three years ending 31st March, 20×1, 20×2, 20×3)

Statement of Profit and Loss

(for the three years ending 31st March, 20×1, 20×2, 20×3)

(Rupees in thousands)

20×1 20×2 20×2
Profit before depreciation and taxes 200 200 200
Less: Depreciation for accounting purposes 50 50 50
Profit before taxes 150 150 150
0.40 (200 –150) 20
0.40 (200) 80 80
Deferred tax

Tax effect of timing differences originating

during the year

0.40 (150 –50)

40
Tax effect of timing differences reversing

during the year

0.40 (0 –50)

(20) (20)
Tax expense 60 60 60
Profit after tax 90 90 90
Net timing differences 100 50 0
Deferred tax liability 40 20 0

In 20×1, the amount of depreciation allowed for tax purposes exceeds the amount of depreciation charged for accounting purposes by Rs. 1,00,000 and, therefore, taxable income is lower than the accounting income. This gives rise to a deferred tax liability of Rs. 40,000. In 20×2 and 20×3, accounting income is lower than taxable income because the

amount of depreciation charged for accounting purposes exceeds the amount of depreciation allowed for tax purposes by Rs. 50,000 each year. Accordingly, deferred tax liability is reduced by Rs. 20,000 each in both the years. As may be seen, tax expense is based on the accounting income of each period.

In 20×1, the profit or loss is debited and deferred tax liability is credited with the amount of tax on the originating timing difference of Rs. 1,00,000 while in each of the following two years, deferred tax liability is debited and profit or loss is credited with the amount of tax on the reversing timing difference of Rs. 50,000.

The following Journal entries will be passed:

Year 20×1
Profit or Loss Dr. 20,000

To Current tax 20,000

(Being the amount of taxes payable for the year 20×1 provided for)

Profit or Loss Dr. 40,000

To Deferred tax 40,000

(Being the deferred tax liability created for originating timing difference of Rs. 1,00,000)

Year 20×2
Profit or Loss Dr. 80,000

To Current tax 80,000

(Being the amount of taxes payable for the year 20×2 provided for)

Deferred tax Dr. 20,000

To Profit or Loss 20,000

(Being the deferred tax liability adjusted for reversing timing difference of Rs. 50,000)

Year 20×3
Profit or Loss Dr. 80,000

To Current tax 80,000

(Being the amount of taxes payable for the year 20×3 provided for)

Deferred tax Dr. 20,000

To Profit or Loss 20,000

(Being the deferred tax liability adjusted for reversing timing difference of Rs. 50,000)

In year 20×1, the balance of deferred tax account i.e., Rs. 40,000 would be shown separately from the current tax payable for the year in terms of paragraph 30 of the Standard. In Year 20×2, the balance of deferred tax account would be Rs. 20,000 and be shown separately from the current tax payable for the year as in year 20×1. In Year 20×3, the balance of deferred tax liability account would be nil.

Illustration 2

In the above illustration, the corporate tax rate has been assumed to be same in each of the three years. If the rate of tax changes, it would be necessary for the entity to adjust the amount of deferred tax liability carried forward by applying the tax rate that has been enacted or substantively enacted by the balance sheet date on accumulated timing differences at the end of the accounting year (see paragraphs 21 and 22). For example, if in Illustration 1, the substantively enacted tax rates for 20×1, 20×2 and 20×3 are 40%, 35% and 38% respectively, the amount of deferred tax liability would be computed as follows:

The deferred tax liability carried forward each year would appear in the balance sheet as under:

31st March, 20×1 0.40 (1,00,000) Rs. 40,000
31st March, 20×2 0.35 (50,000) Rs. 17,500
31st March, 20×3 0.38 (Zero) 0.38 (Zero)

Accordingly, the amount debited/(credited) to the profit or loss (with corresponding credit or debit to deferred tax liability) for each year would be as under:

31st March, 20×1 Debit = Rs. 40,000
31st March, 20×2 (Credit) = Rs. (22,500)
31st March, 20×3 (Credit) = Rs. (17,500)

Illustration 3

A company, ABC Ltd., prepares its accounts annually on 3 1st March. The company has incurred a loss of Rs. 1,00,000 in the year 20×1 and made profits of Rs. 50,000 and 60,000 in year 20×2 and year 20×3 respectively. It is assumed that under the tax laws, loss can be carried forward for 8 years and tax rate is 40% and at the end of year 20×1, it was probable, that the company would have sufficient taxable income in the future years against which unabsorbed depreciation and carry forward of losses can be set-off. It is also assumed that there is no difference between taxable income and accounting income except that set- off of loss is allowed in years 20×2 and 20×3 for tax purposes.

Statement of Profit and Loss

(for the three years ending 31st March, 20×1, 20×2, 20×3)

(Rupees in thousands)

20×1 20×2 20x
Profit (loss) (100) 50 60
Less: Current tax (4)
Tax effect of timing differences originating during the year 40
Tax effect of timing differences reversing during the year (20) (20)
Profit (loss) after tax effect (60) 30 36

Illustration 4

Note: The purpose of this illustration is to assist in clarifying the meaning of the explanation to paragraph 13 of the Standard.

Facts:

1. The income before depreciation and tax of an entity for 15 years is Rs. 1000 lakhs per year, both as per the books of account and for income-tax purposes.

2. The entity is subject to 100 percent tax-holiday for the first 10 years under section 80-IA. Tax rate is assumed to be 30 percent.

3. At the beginning of year 1, the entity has purchased one machine for Rs. 1500 lakhs. Residual value is assumed to be nil.

4. For accounting purposes, the entity follows an accounting policy to provide depreciation on the machine over 15 years on straight-line basis.

5. For tax purposes, the depreciation rate relevant to the machine is 25% on written down value basis.

The following computations are made, ignoring the provisions of section 11 5JB (MAT), in this regard:

Table 1

Computation of depreciation on the machine for accounting purposes and tax purposes

(Amounts in Rs. lakhs)

Year Depreciation for
accounting purposes
Depreciation for tax purposes
1 100 375
2 100 281
3 100 211
4 100 158
5 100 119
6 100 89
7 100 67
8 100 50
9 100 38
10 100 28
11 100 21
12 100 16
13 100 12
14 100 9
15 100 7

At the end of the 15th year, the carrying amount of the machinery for accounting purposes would be nil whereas for tax purposes, the carrying amount is Rs. 19 lakhs which is eligible to be allowed in subsequent years.

Table 2
Computation of Timing differences
(Amounts in Rs. lakhs)
1
2
3
4
5
6
7
8
9
Year
Income before Depreciation and tax (both for accounting purposes and tax purposes)
Accounting Income after depreciation
Gross Total Income after deducting depreciation under tax laws)
Deduction Under section 80-IA
Taxable Income (4-5)
Total Difference between accounting income and taxable
income (3-6)
Permanent Difference (deduction pursuant to section 80-IA)
Timing Difference (due to different amounts of depreciation for accounting purposes and tax purposes)
(O=Originating
and R=Reversing)
1
1000
900
625
625
Nil
900
625
275 (O)
2
1000
900
719
719
Nil
900
719
181 (O)
3
1000
900
789
789
Nil
900
789
111 (O)
4
1000
900
842
842
Nil
900
842
58 (O)
5
1000
900
881
881
Nil
900
881
19(O)
6
1000
900
911
911
Nil
900
911
11 (R)
7
1000
900
933
933
Nil
900
933
33 (R)
8
1000
900
950
950
Nil
900
950
50 (R)
9
1000
900
962
962
Nil
900
962
62 (R)
10
1000
900
972
972
Nil
900
972
72 (R)
11
1000
900
979
Nil
979
-79
Nil
79 (R)
12
1000
900
984
Nil
984
-84
Nil
84 (R)
13
1000
900
988
Nil
988
-88
Nil
88 (R)
14
1000
900
991
Nil
991
-91
Nil
91 (R)
15
1000
900
993
Nil
993
-93
Nil
74 (R)
19 (O)

Notes:

1. Timing differences originating during the tax holiday period are Rs. 644 lakhs, out of which Rs. 228 lakhs are reversing during the tax holiday period and Rs. 416 lakhs are reversing after the tax holiday period. Timing difference of Rs. 19 lakhs is originating in the 15th year which would reverse in subsequent years when for accounting purposes depreciation would be nil but for tax purposes the written down value of the machinery of Rs.19 lakhs would be eligible to be allowed as depreciation.

2. As per the Standard, deferred tax on timing differences which reverse during the tax holiday period should not be recognised. For this purpose, timing differences which originate first are considered to reverse first. Therefore, the reversal of timing difference of Rs. 228 lakhs during the tax holiday period, would be considered to be out of the timing difference which originated in year 1. The rest of the timing difference originating in year 1 and timing differences originating in years 2 to 5 would be considered to be reversing after the tax holiday period. Therefore, in year 1, deferred tax would be recognised on the timing difference of Rs. 47 lakhs (Rs. 275 lakhs- Rs. 228 lakhs) which would reverse after the tax holiday period. Similar computations would be made for the subsequent years. The deferred tax assets/liabilities to be recognised during different years would be computed as per the following Table.

Table 3

Computation of current tax and deferred tax

(Amounts in Rs. lakhs)

Year Current tax
(Taxable Income x 30%)
Deferred tax
(Timing difference x 30%)
Accumulated
Deferred tax (L=
Liability and A =
Asset)
Tax expense
1 Nil 47 × 30%= 14 14 (L) 14
(see note 2 above)
2 Nil 181 × 30%=54 68 (L) 54
3 Nil 111× 30%=33 101 (L) 33
4 Nil 58 × 30%= 17 118 (L) 17
5 Nil 19 × 30%=6 124 (L) 6
6 Nil Nil1 124 (L) Nil
7 Nil Nil1 124 (L) Nil
8 Nil Nil1 124 (L) Nil
9 Nil Nil1 124 (L) Nil
10 Nil Nil1 124 (L) Nil
11 294 –79 × 30%=-24 100 (L) 270
12 295 –84 × 30%=-25 75 (L) 270
13 296 –88 × 30%=-26 49 (L) 270
14 297 –91 × 30%=-27 22 (L) 270
15 298 –74 × 30%=-22 Nil 270
–19 × 30%=-6 6(A)2

subject to probability as per AS 12. If it is so recognised, the said deferred tax asset would be realised in subsequent periods when for tax purposes depreciation would be allowed but for accounting purposes no depreciation would be recognised.

Appendix 1

Note 1: This Appendix is not a part of the Accounting Standard. The purpose of this Appendix is only to bring out the major differences, if any, between revised Accounting Standard (AS) 12 and Indian Accounting Standard (Ind AS) 12, Income Taxes.

Note 2: Paragraph numbers appearing in revised AS 12 may be different as compared to those in Ind AS 12.

Comparison with Ind AS 12, Income Taxes

1. Ind AS 12 is based on balance sheet approach. It requires recognition of tax consequences of differences between the carrying amounts of assets and liabilities and their tax base. However, revised AS 12 is based on income statement approach. It requires recognition of tax consequences of differences between taxable income and accounting income. For this purpose, differences between taxable income and accounting income are classified into permanent and timing differences.

2. As per Ind AS 12, current and deferred tax are 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 transaction or event which is recognised outside profit or loss, either in other comprehensive income or directly in equity, in those cases tax is also recognised in other comprehensive income or in equity, as appropriate. However, revised AS 12 does not specifically deal with this aspect.

3. As per Ind AS 12, deferred tax liability is recognised for all taxable temporary differences associated with investments in subsidiaries, associates and joint ventures, if certain conditions are satisfied. Revised AS 12 does not deal with this aspect.

4. As per Ind AS 12, deferred tax should be recognised on temporary differences that arise from the elimination of profit and losses resulting from the intra- group transactions. While revised AS 12 does not deal with this aspect.

5. Ind AS 12 requires that deferred tax asset/liability arising from revaluation of non-depreciable assets shall be measured on the basis of tax consequences from the sale of asset rather than through use. Revised AS 12 does not deal specifically with this aspect.

6. Ind AS 12 provides guidance as to how an entity should account for the tax consequences of a change in its tax status or that of its shareholders. Revised AS 12 does not deal with this aspect.

7. Revised AS 12 specifically provides guidance regarding recognition of deferred tax in the situations of Tax Holiday under Sections 80-IA and 80-IB and Tax Holiday under Sections 1 0A and 1 0B of the Income Tax Act, 1961. Similarly, revised AS 12 provides guidance regarding recognition of deferred tax asset in case of loss under the head ‘capital gains’.

Ind AS 12 does not specifically deal with these situations.

8. Revised AS 12 specifically provides guidance regarding tax rates to be applied in measuring deferred tax assets/liabilities in a situation where a company pays tax under section 11 5JB. Ind AS 12 does not specifically deal with this aspect.

9. Ind AS 12 specifically provides guidance on Uncertainty over Income Tax treatment whereas revised AS 12 does not contain such guidance.

10. Disclosure requirements given in Ind AS 12 are more detailed as compared to revised AS 12.

Appendix 2

Note 1: This Appendix is not a part of the Accounting Standard. The purpose of this Appendix is only to bring out the major differences, if any, between revised Accounting Standard (AS) 12 and existing Accounting Standard (AS) 22, Accounting for Taxes on Income.

Note 2: Paragraph numbers appearing in revised AS 12 may be different as compared to those in AS 22.

Comparison with existing AS 22, Accounting for Taxes on Income

1. As per revised AS 12, deferred tax asset is recognised for all timing differences to the extent that it is probable that sufficient taxable profit will be available against which the timing difference can be realised. The criteria for recognising deferred tax assets arising from unabsorbed depreciation and carry forward of losses are the same that for recognising deferred tax assets arising from timing differences. However, the existence of unabsorbed depreciation and carry forward of losses is strong evidence that future taxable profit may not be available. Therefore, when an entity has a history of recent losses, the entity recognises a deferred tax asset arising from unabsorbed depreciation and carry forward of losses only to the extent that it has timing differences the reversal of which will result in sufficient income or there is other convincing evidence that sufficient taxable income will be available against which such deferred tax assets can be realised.

While, as per existing AS 22, deferred tax assets are recognised 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 realised. Where deferred tax asset is recognised against unabsorbed depreciation or carry forward of losses under tax laws, it is recognised only to the extent that there is virtual certainty that sufficient future taxable income will be available against which such deferred tax assets can be realised.

Notes:-

1 Prior to the constitution of National Financial Reporting Authority (NFRA) on October 1, 2018, NACAS was advisory/recommendatory body to MCA for prescribing Accounting Standards under Section 133 of the Companies Act, 2013.

1. No deferred tax is recognised since in respect of timing differences reversing during the tax holiday period, no deferred tax was recognised at their origination.

2. Deferred tax asset of Rs. 6 lakhs would be recognised at the end of year 15.

Source link:-

1. https://www.icai.org/post/exposure-draft-of-revised-as-12-income-taxes

2. https://resource.cdn.icai.org/64776asb51975.pdf

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