IND AS 12, prescribe the accounting treatment of current and future tax consequences. It is possible that recovery of carrying value of assets or settlement of carrying value of liabilities may result into larger or shorter future tax payments. This Standard requires an entity to recognize a Deferred Tax Liability (DTL) and Deferred Tax Asset (DTA), with certain limited exceptions. Income tax includes domestic and foreign taxes.
This standard follow Balance Sheet approach instead of Profit & Loss approach as prescribed by AS22. Further this standard prescribe determination of DTA/DTL basis the Taxable Temporary Differences (TTD) or Deductible Temporary Differences (DTD) instead of concept of permanent or temporary timing differences followed under AS22.
Difference between carrying amount of assets and liabilities and there tax base result into temporary differences. Carrying value is the book value of assets & liabilities and tax base need to be determined
1. Determination of Tax Base
2. Tax base for Assets
In case of asset tax base is the value for which no tax in future stand payable when carrying value of such assets are realized e.g.
1. A Ltd purchased a depreciable PPE for Rs 100 which was depreciated in books @ 10% (SLM) and in tax @ 20% (WDV) at year end carrying value will be Rs 90 and its tax base will be Rs 80. Accordingly if such asset is sold in future then no tax stand payable up to Rs 80 therefore its tax base will be Rs 80
2. A Ltd purchased a land for Rs 100 which remained in books at Rs 100 whereas for tax post indexation benefit of section 48 its value is say Rs 120 then its tax base will be Rs 120 as when such land is sold in future then up to Rs 120 no tax stand payable
3. A Ltd purchased land for Rs 100 which was revalued to Rs 150 and its indexed value for tax is say Rs 120, since the FMV is not considered for Income tax therefore for its tax base value still remains at Rs 120
Tax base for liabilities
Tax base in case of liabilities are the difference between its carrying value and value up to which no tax stand payable in future when such liability is settled e.g.
1. A Ltd incurred salary expense of Rs 100 which is deductible under income tax also in the year in which incurred, since the tax benefit of that expenditure has been utilized today itself and there is no benefit to be accrued in future therefore difference will be of carrying value Rs 100 and NIL (the value benefit of which would accrue in future) i.e. (Rs 100 less 0=Rs 100) thus the tax base of liability will be Rs 100
2. A Ltd incurred an expense covered u/s 43B, which is deductible on payment basis under tax. In this since for tax purpose benefit of this expense has not been taken in current date and benefit will accrue in future date when such expense is actually paid then difference of carrying value (Rs 100) and value for which benefit will accrue in future (Rs 100) is (Rs 100 less Rs 100=0) therefore its tax base will be Rs 0
1. Determination of Taxable Temporary Difference and Deductible Temporary Difference
Once carrying amount and tax base are determined, temporary difference are then classified into either Taxable Temporary Difference (TTD) or Deductible Temporary Difference (DDT).
Taxable Temporary Difference
When such difference result in taxable amounts in determining taxable profit/ loss of future period at time when the carrying amount of asset or liability is recovered or settled, such difference are taxable temporary differences (TTD).
Deductible Temporary Difference
when such differences are deductible in determining future taxable profit/ loss when carrying amount of asset or liability are settled are deductible temporary differences (DTD)
To understand this complex definition, we can refer the following simplified approach:
In case of assets when carrying amount is more than its tax base, it results into TTD on which DTL is recognized and when carrying amount is less than its tax base, it result into DTD on which DTA is recognized
In case of liabilities when carrying amount is more than its tax base, it results into DTD on which DTA is recognized and when carrying amount is less than its tax base, it results into TTD on which DTL is recognized
|Particulars||Carrying Value||Tax Base||Difference||Nature||DTL/ DTA|
|Land (Indexed u/s 48)||100||120||20||DTD||DTA|
|Land (Revalued in books)||150||120||30||TTD||DTL|
|Provisions for expense deductible under tax also||100||100||0||NA||NA|
|43B nature exp.||100||0||100||DTD||DTA|
1. Exceptions to the basic principal (Para 15 and Para 24 of IND AS 12)
Para 15 (Exception to DTL recognition)
A deferred tax liability shall be recognized for all taxable temporary differences, except to the extent that the deferred tax liability arises from:
1. is not a business combination and
2. at the time of transaction, affects neither accounting profit nor taxable profit(tax loss)
However, for taxable temporary differences associated with investments in subsidiaries, branches and associates, and interests in joint arrangements, a deferred tax liability shall be recognized in accordance with paragraph 39.
Para 24 (Exception to DTA recognition)
A deferred tax asset shall be recognized for all deductible temporary differences to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilized, unless the deferred tax asset arises from the initial recognition of an asset or liability in a transaction that:
However, for deductible temporary differences associated with investments in subsidiaries, branches and associates, and interests in joint arrangements, a deferred tax asset shall be recognized in accordance with paragraph 44.
The fine difference between exception to DTA & DTL recognition can be seen w.r.t. Goodwill resulting from initial recognition, which fall under exception for DTL alone, however exception that if difference resulting at time of initial recognition itself for both asset and liability irrespective of DTL or DTL are recognized only if such difference impact the taxable profit/ loss
This can be better understood with help of an examples
2. A Ltd incurred preliminary expense of Rs 100 of which 1/5th is charged to P&L during the year, though there is difference at time of initial recognition itself but since this is impacting taxable profit or loss, this will not fall under exception to para 15 and 24 and DTL/ DTA will be recognized
3. A Ltd acquired B Ltd, WDV of B Ltd was Rs 100 and A Ltd paid Rs 75 (of which Rs 5 towards goodwill). Carrying value of assets acquired will be Rs 70 and Rs 5 will be booked as goodwill, whereas for tax base Rs 100 (WDV) of B Ltd stand deductible. Since carrying value is less than tax base, difference results into DTD and DTA is recognized. This position is covered under Para 24 and DTA will be recognized on goodwill
4. A Ltd acquired B Ltd, WDV of B Ltd was Rs 100 and A Ltd paid Rs 175 (of which Rs 5 towards goodwill). Carrying value of assets acquired will be Rs 170 and Rs 5 will be booked as goodwill, whereas for tax base Rs 100 (WDV) of B Ltd stand deductible. Since carrying value is more than tax base, difference results into TTD and DTL is recognized. This position is covered under Para 15 and DTL will not be recognized on goodwill
1. In addition, DTA is recognized w.r.t.
2. Carry forward of unused tax losses and
3. Carry forward of unused tax credits
Where unused tax losses, covers both brought forward business loss and unabsorbed depreciation and unused tax credit will cover MAT credit carried forward u/s 115JAA and u/s 115JD
DTA w.r.t. carry forward of unused tax losses and unused tax credit
Upto an extent entity has DTL, DTA can be recognized and for recognition beyond that there should be other convincing evidence basis which it is probable that future taxable profit will be available against which the unused tax losses and unused tax credits can be utilized. AS 22 used to test both virtual certainty supported by convincing evidence whereas IND AS 12 test basis convincing evidence.