AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
Accounting for Taxes on Income
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....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 should 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 enterprise should account for taxes that are payable on distribution of dividends and other distributions made by the enterprise. Definitions 4. For the purpose of this Standard, the following terms are used with the meanings specified: 4.1 Accounting income (loss) is the net profit or loss....
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....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 prudence (see paragraphs 15-18). Recognition 9. 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. 10. Taxes on income are considered to be an expe....
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....erences originate. However, recognition of deferred tax assets is subject to the consideration of prudence as laid down in paragraphs 15 to 18. (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 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 should recognise the tax effect, whether current or deferred, of all the transactions occurring in that period. 15. Except in the situations stated in paragraph 17, 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. 16. While recognising the tax effect of timing differences, consideration of prudence cannot be ignored. Therefore, deferred tax assets are recognised and carried forward only to the extent that there is a reasonable certainty of their realisation....
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....tal gains' in subsequent years subject to the provisions of the Act. In respect of such 'loss', deferred tax asset is recognised and carried forward subject to the consideration of prudence. Accordingly, in respect of such 'loss', deferred tax asset is recognised and carried forward only to the extent that there is a virtual certainty, supported by convincing evidence, that sufficient future taxable income will be available under the head 'Capital gains' against which the loss can be se-off as per the provisions of the Act. Whether the test of virtual certainty is fulfilled or not would depend on the facts and circumstances of each case. The examples of situations in which the test of virtual certainty, supported by convincing evidence, for the purposes of the recognition of deferred tax asset in respect of loss arising under the head 'Capital gains' is normally fulfilled, are sale of an asset giving rise to capital gain (eligible to set-off the capital loss as per the provisions of the Act) 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 s....
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....iabilities 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 Act. (c) In case an enterprise expects that the timing differences arising in the current period would reverse in a period in which it may pay tax under section 115JB of the Act, 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 22, is measured using the regular tax rates and not the tax rate under section 115JB of the Act. 22. 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. 23. When different tax rates apply to different levels of taxable income, deferred tax assets and liabilities are measured using ave....
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....ilities 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. Explanation Deferred tax assets (net of the deferred tax liabilities, if any, in accordance with pragraph 29) is disclosed on the face of the balance sheet separately after the head 'Investment's and deferred tax liabilities (net of the deferred tax assets, in any, in accordance with paragraph 29) is disclosed on the face of the balance sheet separately after the head 'Unsecured Loans'. 31. 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. 32. The nature of the evidence supporting the recognition of deferred tax assets should be disclosed, if an enterprise has unabsorbed depreciation or carry forward of losses under tax laws. Transitional Provisions 33. On the first occasion that the taxes on income are accounted for in accordance with this Standard, the enterprise sh....
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....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 by the Finance Act, 2001. 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 when they crystallize. 2. Expenses amortized in the books over a period of years but are allowed for tax purpo....
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....,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 20x1 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, 20x1, 20x2, 20x3) (Rupees in thousands) 20x1 20x2 20x3 Profit before depreciation and taxes 200 200 200 Less: Depreciation for accounting purposes 50 50 50 Profit before taxes 150 150 150 Less: Tax expense Current tax 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) ....
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....ndard. In Year 20x2, 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 20x1. In Year 20x3, 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 enterprise 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 20x1, 20x2 and 20x3 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, 20x1 = 0.40 (1,00,000) = Rs. 40,000 31st March, 20x2 = 0.35 (50,000) = Rs. 17,500 31st March, 20x3 = 0.38 (Zero) = Rs. Zero Accordingly, the amount debited/(credited) to the ....
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....owing computations will be made, ignoring the provisions of section 115JB (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 ....
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....e 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 47x30% = 14 (see note 2 above) 14(L) 14 2 Nil 181x30%=54 68L 54 3 Nil 111x30%=33 101(L) 33 4 Nil 58x30%=17 118(L) 17 5 Nil 19x30%=6 124(L) 6 6 Nil Nil^[1] 124(L) Nil 7 Nil Nil^[2] 124(L) Nil 8 Nil Nil^[3] 124(L) Nil 9 Nil Nil^[4] 124(L) Nil 10 Nil Nil^[5] 124(L) Nil 11 294 -79x30%=24 100(L) 270 12 295 -84x30%=25 75(L) 270 13 296 -88x30%=26 49(L) 270 14 297 -91x30%=....