AS-22 BY DEEEPSH VORA

AS 22 – Accounting for Taxes on Income


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

• It does not cover FBT, Dividend Tax, etc.


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. 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.

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.



Recognition

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

• Deferred tax should be recognised for all the timing differences, subject to the consideration of prudence in respect of deferred tax assets.

• Except in the situations stated below, deferred tax assets should be 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 an enterprise has unabsorbed depreciation or carry forward of losses under tax laws, deferred tax assets should be recognised only to the extent that there is virtual certainty supported by convincing evidence that sufficient future taxable income will be available against which such deferred tax assets can be realised.



Measurement

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

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

• The carrying amount of deferred tax assets should be reviewed at each balance sheet date. An enterprise should write-down the carrying amount of a deferred tax asset to the extent that it is no longer reasonably certain 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 reasonably certain that sufficient future taxable income will be available.



Presentation and Disclosure

• An enterprise should offset assets and liabilities representing current tax if the enterprise:
(a) has a legally enforceable right to set off the recognized amounts; and
(b) intends to settle the asset and the liability on a net basis.

• An enterprise should offset deferred tax assets and deferred tax liabilities if:
(a) the enterprise 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.

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

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

• The nature of the evidence supporting recognition of deferred tax assets should be disclosed, if an enterprise has unabsorbed depreciation or carry forward of losses under tax laws.



Transitional Provisions

On the first occasion that the taxes on income are accounted for in accordance with this Statement, the enterprise should recognise, in the financial statements, the deferred tax balance that has accumulated prior to the adoption of this Statement as deferred tax asset/liability with a corresponding credit/charge to the revenue reserves, subject to the consideration of prudence in case of deferred tax assets. The amount so credited/charged to the revenue reserves should be the same as that which would have resulted if this Statement had been in effect from the beginning.



Examples of Timing Differences
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 accrued in the statement of profit and loss on mercantile basis but allowed for tax purposes in subsequent years on payment basis.
b) Payments disallowed for tax purposes under section 40(a) and allowed for tax purposes in subsequent years when relevant tax is deducted or paid.
c) Provisions made in the books in anticipation of liabilities where the relevant liabilities are allowed in subsequent years 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 ofdepreciation 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.



AS – 22 in the situations of tax benefits u/s 80-IA and 80-IB, 10A, 10B of the Income-tax Act, 1961

• The deferred tax in respect of timing differences which reverse during the tax holiday period should not be recognised to the extent the enterprise’s gross total income is subject to the deduction during the tax holiday period as per the requirements of the Act.

• Deferred tax in respect of timing differences which reverse after the tax holiday period should be recognised in the year in which the timing differences originate. However, recognition of deferred tax assets should be subject to the consideration of prudence

• For the above purposes, the timing differences which originate first should be considered to reverse first.

Eg.
Tax holiday available for 15 years
Original cost of Machinery : Rs. 1500 lakhs
Depreciation as per books : SLM to be w/off in 15 years
Depreciation as per I.T. Act : 15% WDV

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.



AS – 22 in the situations of Section 115JB (MAT)

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 rising during the period, tax effect of which is required to be recognized under AS 22, should be measured using the regular tax rates and not the tax rate under section 115JB of the Act.