Income Taxes (Ind AS 12, IAS 12) by incorporating Changes as per Companies (Indian Accounting Standards) Amendment Rules 2023.
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 Ind AS 12 and IAS 12.
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.
a. To prescribe Accounting treatment for Income Taxes.
b. To Prescribe the accounting for current and future tax consequence.
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.
Tax base of liability= Carrying Amount less Future deductible amounts as per Income Tax Act +Future taxable amounts as per Income Tax Act .
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.
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.
If Carrying Amount>Tax Base, Then Deductible temporary difference will happen in the case of Liabilities. Then Deferred Tax Asset will be recognized.
If Carrying Amount<Tax Base, Then Deductible temporary difference will happen in the case of Assets. Then Deferred Tax Asset will be recognized.
If Carrying Amount<Tax Base, Then Taxable temporary difference will happen in the case of Liabilities. Then Deferred Tax Liability will be recognized.
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.
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 recognized 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 un-recognized 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 un-recognized 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.
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 recognized 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 recognized as an asset.
7. MCA notifies Companies (Indian Accounting Standards) Amendment Rules, 2021vide 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;
8. Companies (Indian Accounting Standards) Amendment Rules 2023.
Following amendments have been made.
(i)in paragraph 15, an item (b)
(a) in sub-item (i) ,the word “and” shall be omitted
(b)for sub-item (ii),the following shall be substituted, namely:
“(ii) At the time of the transaction, affects neither accounting profit nor taxable profit
(Tax loss); and
(iii) At the time of the transaction, does not give rise to equal taxable and deductible
(ii) In paragraph22, for items (b) and (c), the following items shall be substituted, namely:-
“(b) if the transaction affects either accounting profit or taxable profit, or gives rise to equal taxable and deductible temporary differences, an entity recognizes any deferred tax liability or asset and recognizes the resulting deferred tax expense or income in profit or loss (see paragraph 59);
(c) if the transaction is not a business combination, affects neither accounting profit nor taxable profit and does not give rise to equal taxable and deductible temporary differences, an entity would, in the absence of the exemption provided by paragraphs 15 and 24, recognize the resulting deferred tax liability or asset and adjust the carrying Amount of the asset or liability by the same amount. Such adjustments would make the Financial statements less transparent. Therefore, this Standard does not permit an entity to recognize the resulting deferred tax liability or asset, either on initial recognition or Subsequently (see example below). Furthermore, an entity does not recognize subsequent changes in the unrecognized deferred tax liability or asset as the Asset is depreciated”.
(iii) After paragraph 22, the following paragraph shall be inserted, namely:-
22A A transaction that is not a business combination may lead to the initial recognition of an asset And a liability and, at the time of the transaction, affect neither accounting profit nor taxable profit. For example, at the commencement date of a lease, a lessee typically recognizes a lease liability And the corresponding amount as part of the cost of a right-of-use asset. Depending on the applicable tax law, equal taxable and deductible temporary differences may arise on initial recognition of the asset And liability in such a transaction. The exemption provided by paragraphs 15 and 24 does not apply to such temporary differences and an entity recognizes any resulting deferred tax liability And asset.
(iv) In paragraph 24-
(a) in sub-item (a) ,the word “and” shall be omitted
(b) for sub-item (b),the following shall be substituted, namely:
“(b) At the time of the transaction, affects neither accounting profit nor taxable profit
(Tax loss); and
(c) at the time of the transaction, does not give rise to equal taxable and deductible
(v) After paragraph 98I, the following shall be inserted, namely
98J. Deferred Tax related to Assets and Liabilities arising from a Single Transaction, issued in May 2021, amended paragraphs 15, 22 and 24 and added paragraph 22A. An entity shall apply these amendments in accordance with paragraphs 98K–98L for annual reporting Periods beginning on or after 1 January 2023. Earlier application is permitted.
98K. An entity shall apply Deferred Tax related to Assets and Liabilities arising from a Single Transaction to transactions that occur on or after the beginning of the earliest comparative Period presented.
98L. An entity applying Deferred Tax related to Assets and Liabilities arising from a Single Transaction shall also, at the beginning of the earliest comparative period presented:
(a) recognize a deferred tax asset—to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilized—and a deferred tax liability for all deductible and taxable temporary differences associated with:
(i) right-of-use assets and lease liabilities; and
(ii) decommissioning, restoration and similar liabilities and the corresponding amounts recognized as part of the cost of the related asset; and
(b) recognize the cumulative effect of initially applying the amendments as an adjustment to the opening balance of retained earnings (or other component of equity, as appropriate) at that date.
(Republished with amendments)