TaxTMI 
TaxTMI 
TaxTMI 
Accounting for Taxes on Income
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....e 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. ^1[2A. This Standard applies to taxes on income arising from tax law enacted or substantively enacted to implement the Pillar Two model rules published by the Organisation for Economic Co-operation and Development (OECD), including tax law that implements qualified domestic minimum top-up taxes described in those rules. Such tax law, and the taxes on ....
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....art of an item of expenditure, the disallowed amount would result in a permanent difference. 7. Timing differences are those 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. Timing differences arise because the period in which some items of revenue and expenses are included in taxable income do not coincide with the period in which such items of revenue and expenses are included or considered in arriving at accounting income. For example, machinery purchased for scientific research related to business is fully allowed as deduction in the 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 writt....
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....Income-tax Act, 1961. In case of sections 10A/10B of the Income-tax Act, 1961 (covered under Chapter III of the Income-tax Act, 1961 dealing with incomes which do not form part of total income), the deferred tax in respect of timing differences which reverse during the tax holiday period is not recognised to the extent deduction from the total income of an enterprise is allowed during the tax holiday period as per the provisions of the said sections. (b) Deferred tax in respect of timing differences which reverse after the tax holiday period is recognised in the year in which the timing differences 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 ....
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....at head as per the requirements of the Income-tax Act, 1961. (b) Where an enterprise's statement of profit and loss includes an item of 'loss' which can be set-off in future for taxation purposes, only against the income arising under the head 'Capital gains' as per the requirements of the Income-tax Act, 1961, that item is a timing difference to the extent it is not set-off in the current year and is allowed to be set-off against the income arising under the head 'Capital gains' in subsequent years subject to the provisions of the Income-tax Act, 1961. 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 set-off as per the provisions of the Income-tax Act, 1961. 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 te....
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.... and tax laws. 21. 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. Explanation: (a) The payment of tax under section 115JB of the Income-tax Act, 1961 is a current tax for the period. (b) In a period in which a company pays tax under section 115JB of the Income-tax Act, 1961, the deferred tax assets and liabilities 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 Income-tax Act, 1961. (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 Income-tax Act, 1961, 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 Income-tax Act, 1961. 22. Deferred tax asse....
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.... payment. 29. 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. 30. 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. 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. ^2[International tax reform-Pillar Two model rules 32A. An enterprise should disclose that it has applied the exception to recognising and disclosing infor....
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....evenue reserves, subject to the consideration of prudence in case of deferred tax assets (see paragraphs 15-18). The amount so credited/charged to the revenue reserves should be the same as that which would have resulted if this Standard had been in effect from the beginning. 34. For the purpose of determining accumulated deferred tax in the period in which this Standard is applied for the first time, the opening balances of assets and liabilities for accounting purposes and for tax purposes are compared and the differences, if any, are determined. The tax effects of these differences, if any, should be recognised as deferred tax assets or liabilities, if these differences are timing differences. For example, in the year in which an enterprise adopts this Standard, the opening balance of a fixed asset is Rs. 100 for accounting purposes and Rs. 60 for tax purposes. The difference is because the enterprise applies written down value method of depreciation for calculating taxable income whereas for accounting purposes straight line method is used. This difference will reverse in future when depreciation for tax purposes will be lower as compared to the depreciation for accounting p....
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....nt 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 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 of depreciation 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....
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....bsp; Tax effect of timing differences reversing during the year 0.40 (0 50) (20) (20) Tax expense 60 60 60 after tax 90 90 90 Net timing differences 100 50 0 Deferred tax liability 40 20 0 In 20x1, the amount of depreciation allowed for tax purposes exceeds the amount of depreciation charged for accounting purposes by Rs. 1,00,000 and, therefore, taxable income is lower than the accounting income. This gives rise to a deferred tax liability of Rs. 40,000. In 20x2 and 20x3, accounting income is lower than taxable income because the amount of depreciation charged for accounting purposes exceeds the amount of depreciation allowed for tax purposes by Rs. 50,000 each year. Accordingly, deferred tax liability is reduced by Rs. 20,000 each in both the years. As may be seen, tax expense is based on the accounting income of each period. In 20x1, the profit and loss account is debited and deferred tax liability account is credited with the amount of tax on the originating timing difference of Rs. 1,00,000 while in each of the following two years, deferred tax liability....
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....n 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 profit and loss account (with corresponding credit or debit to deferred tax liability) for each year would be as under: 31st March, 20x1 Debit = Rs. 40,000 31st March, 20x2 (Credit) = Rs. (22,500) 31st March, 20x3 (Credit) = Rs. (17,500) Illustration 3 A company, ABC Ltd., prepares its accounts annually on 31st March. The company has incurred a loss of Rs. 1,00,000 in the year 20x1 and made profits of Rs. 50,000 and 60,000 in year 20x2 and year 20x3 respectively. It is assumed that under the tax laws, loss can be carried forward for 8 years and tax rate is 40% and at the end of year 20x1, it was virtually certain, supported by convincing evidence, that the company would have sufficient taxable income in the futu....
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.... 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 Between accounting income and taxable income (3-6) Permanent Difference (deduction pursuant to section 80-IA) Timing Difference(due to different amounts of depreciation for accounting purposes and tax purposes) (O= Originating and R=Reversing ) 1 1000 900 625 625 Nil 900 625 275 (O) 2 1000 900 719 719 Nil 900 719 181 (O) 3 1000 900 789 789 Nil 900 789 111 (O) 4 1000 900 842 842 Nil 900 842 58 (O) 5 1000 900 881 881 Nil 900 881 19(O) 6 1000 900 911 911 Nil 900 911 11 (R) 7 1000 900 933 933 Nil 900 933 33 (R) 8 ....