Income Taxes (Ind AS 12, IAS 12) (By incorporating Changes as per Companies (Indian Accounting Standards) Amendments Rules 2021)

1. The relevant Accounting Standards relating to Income Taxes are the following:-

a. Ind AS 12

b. IAS 12

c. AS 22

2. There is no major difference between IND AS 12 and IAS 12.Therefore, the following descriptions relate to both INDAS 12 and IAS 12.

INCOME TAX red Rubber Stamp over a white background

3. Significance of this Standard

Differences between the Profit as per Financial Statements and Profit Calculated as Income Tax laws is one of the main reason to introduce this standard. Why differences?

a. The accrual basis is followed for calculating the income (loss) whereas tax law does not follow the accrual system of accounting for all expenses and revenue.

b. Tax law allows more depreciation than the accounting principles

c. Provision for expenses is accounted on accrual basis in accounting whereas in tax, these expenses are allowed only on cash basis by the tax authority.

How can adjust those differences? This standard gives the answer

4. Objectives.

a. To prescribe Accounting treatment for Income Taxes

b. To Prescribe the accounting for current and future tax consequence

Scope

A. This Standard shall be applied in accounting for income taxes.

B. As per this Standard, income taxes include all domestic and foreign taxes which are based on taxable profits

C. This Standard does not deal with the methods of accounting for government Grants or Investment Tax Credits.

6. Differences between the Profit as per Financial Statements and Profit Calculated as Income Tax laws. How can adjust? Following are the steps

I. Calculation of Tax Base. (Carrying Amount as per Tax Law)

First,You have to find out Tax Base as follows—-

A. Tax Base of Asset=Carrying Amount less Future taxable amounts as per Income Tax Act (Income from Business or Capital Gain or Other sources) +Future deductible amounts as per Income Tax Act ( As per Income Tax  Act  Heads Business or Capital Gains or Other Sources).

A future taxable amount is generally the amount arising from recovery of the asset and is limited to the assets carrying amount. The future taxable amount is the income earned from the asset used or proceeds arising from its disposal that is taken into the determination of the taxable profit. If the income generated by the asset is non-taxable then both the future taxable amount and future deductible amount are Nil and the tax base is equal to the carrying amount.

B. Tax base of liability= Carrying Amount less Future deductible  amounts as per Income Tax Act + Future taxable amounts as per Income Tax Act .

C. Tax base of liability for Revenue received in advance= Carrying Amount less Amount of revenue that will not be taxable in future periods as per Income Tax Act.

II. Calculation Temporary Difference and Permanent Differences.

A. Permanent Differences

Permanent differences occur when certain items of revenue or expenses are excluded from the computation of taxable profits. For example, entertainment expense may not be allowable for tax purposes. Another example is donation which is not allowed under section 80 G. Such donation is allowed in the books of account in the year of payment. But it is not allowed in income Tax either in the year of payment or in any future period. So this, difference will become permanent .Permanent differences do not reverse subsequently. They remain permanent .Hence, they are ignored.

B. Temporary differences

To find out Deferred Tax Asset or Deferred Tax Liability, You have to find out Taxable Temporary Difference or Deductible temporary difference as follows—-

If Carrying Amount>Tax Base, Then Taxable temporary difference will happen in the case of Assets. Then Deferred Tax Liability will be recognized.

Whereas

If Carrying Amount>Tax Base, Then Deductible temporary difference will happen in the case of Liabilities. Then Deferred Tax Asset will be recognized.

Whereas

If Carrying Amount<Tax Base, Then Deductible temporary difference will happen in the case of Assets. Then Deferred Tax Asset will be recognized.

Whereas

If Carrying Amount<Tax Base, Then Taxable temporary difference will happen in the case of Liabilities. Then Deferred Tax Liability will be recognized.

Whereas

Carrying Amount=Tax Base, No DTA or DTL

III. Calculation of DTA OR DTL.

Then you have to find out Deferred Tax Asset (DTA) or Deferred Tax Liability (DTL) as follows

DTA= Deductible temporary difference*Tax Rate

DTL= Taxable temporary difference*Tax Rate.

The IndAS  12 requires that DTL or DTA should be measured at tax rates as applicable in the period during which the asset is recovered or liability is settled i.e. based on tax rates & laws enacted or substantially enacted at the end of reporting period.

IV .Recognition

A. Normally both current tax & deferred tax expenses or deferred tax incomes are shown in the SOPL.

Except in the following cases

a. Additional deferred tax that arises on the revaluation is recognized in Other Comprehensive Income.

b. Current tax and deferred tax that relates to items that are recognized in the same or a different period:

i. In Other Comprehensive income ,shall be recognized in Other Comprehensive Income

ii. Directly in Equity shall be recognized in Equity

c.As an Adjustment to Goodwill in the case of Business Combination.

Components of tax expense (income) may include:

(a) current tax expense (income);

(b) any adjustments recognised in the period for current tax of prior periods;

(c) the amount of deferred tax expense (income) relating to the origination and reversal of temporary differences;

(d) the amount of deferred tax expense (income) relating to changes in tax rates or the imposition of new taxes;

(e) the amount of the benefit arising from a previously unrecognised tax loss, tax credit or temporary difference of a prior period that is used to reduce current tax expense;

(f) the amount of the benefit from a previously unrecognised tax loss, tax credit or temporary difference of a prior period that is used to reduce deferred tax expense;

(g) deferred tax expense arising from the write-down, or reversal of a previous write-down, of a deferred tax asset in accordance with paragraph 56; and

(h) the amount of tax expense (income) relating to those changes in accounting policies and errors that are included in profit or loss in accordance with Ind AS 8, because they cannot be accounted for retrospectively.

B. Recognize in the Balance sheet /Statement of Financial Position as follows

I. Non-Current Assets

Deferred Tax Assets

II. Current Assets

Current Tax Assets

III. Non –current liabilities

Deferred tax liabilities

IV. Current liabilities

Current tax liabilities.

Current tax is the amount of income taxes payable (recoverable) in respect of the taxable profit (tax loss) for a period.

Current tax for current and prior periods shall, to the extent unpaid, be recognised as a liability. If the amount already paid in respect of current and prior periods exceeds the amount due for those periods, the excess shall be recognised as an asset.

7. MCA notifies Companies (Indian Accounting Standards) Amendment Rules, 2021 vide Notification No. G.S.R. 419(E) Dated: 18th June, 2021.

Changes to this Standard.

In “Indian Accounting Standard (Ind AS) 12”, in paragraph 29, in sub-item (i) of item (a), for the word and symbol “differences.” appearing at the end of second sentence, the words and symbol and “differences; and ” shall be substituted;

(Republished with amendments)

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