Deferred Taxation AS 22 and

Latest Developments

AS 22 Accounting for Taxes on Income

ICAI Statements
Standards
(Mandatory)

Guidance Notes
(Recommendatory)

Accounting Standards ( 29 + 1 )
A S I (29) {7 of AS 22}

Auditing & Assurance Standards (SAP) ( 32 + 2 )

General Clarification (18)

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AS 22 Accounting for Taxes on Income

Accounting Standards u/s.211(3c)

(wef 31.10.1998)

Accounting Standard means the standard of accounting: Recommended by ICAI and Prescribed by Government in Consultation with the NACAS constituted u/s 210A(1) of the Companies Act, 1956.
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AS 22 Accounting for Taxes on Income

4.(d) In our opinion, the Balance Sheet, P&L Account and the

Deviation from AS

Cash Flow Statement dealt with by this report comply with the AS referred to in Sec. 211(3C) of the Companies Act, 1956 subject to the following observations: Certain Transactions are accounted on cash basis vide significant policy No. 2. Further contract works / certain consultancy works undertaken by the company are not accounted on accrual basis vide note 11 on the accounts. The extent of impact on accounts is not ascertained. Accounting Policy No. 13(b) is not in accordance with AS 10 on Fixed Assets. Certain transaction accounted under this policy has the effect of overstating value of Fixed Assets, Depreciation and profit by Rs. 2.05 Crores, Rs. 0.16 Crores and Rs. 1.89 Crores respectively
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AS 22 Accounting for Taxes on Income

Level - I

Listed/Proposed to be listed Cos Banks, FIs, Insurance Cos Enterprises with > 50 crores Turnover in preceding year > 10 crores borrowings at any time during the year Holding & subsidiary Cos of above. Enterprises with > 40 Lacs but < 50 crores Turnover. > 1 crore but < 10 crores borrowings Holding & subsidiary cos of above. Other than Level - I & Level - II cases w.e.f 17-Sep-2003
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Level - II

Level - III

AS 22 Accounting for Taxes on Income

Applicability of AS 22 (For All Levels - I / II/ III)

Companies listed and in the 01.04.2001 process of listing in India including Group companies. In respect of other companies not 01.04.2002 covered above. 01.04.2004 In respect of all other enterprises.
01.04.2006
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AS 22 Accounting for Taxes on Income

Deferred Tax
Deferred Taxes are Income Tax which arise in one period but because of Timing Difference will have to be actually paid in later years.

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AS 22 Accounting for Taxes on Income

Timing differences -TD- Differences between TI and AI for a period that originate in one period and are capable of reversal in one or more subsequent periods.

Permanent differences -PD- are the differences between TI and AI for a period that originate in one period and do not reverse subsequently.

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AS 22 Accounting for Taxes on Income

Deferred Tax
Taxable Income
Accounting Income
As per P&L A/c As per IT Return

Current Tax
(applicable rate/law)

Rs. 70 cr Timing Difference Rs. 20 cr

Tax Expense

Deferred Tax
(substantively enacted rates /law) Average rate ?

Rs. 100 cr

Permanent Difference
Rs. 10 cr

No Tax effect

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AS 22 Accounting for Taxes on Income

Deferred Tax
Accounting Income
As per P&L A/c

Taxable Income
As per IT Return

Rs. 80 cr

Current Tax

Rs. 90 cr

(DTL)
or

Timing Difference
Reversal or DTA

DTA Prudence

Rs. 20 cr

Permanent Difference
Rs. 10 cr

No Tax effect

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AS 22 Accounting for Taxes on Income

Computation of DT
STI AI +/- PD +/- TD TI CT = IT on TI p (Applicable tax rates/laws) DT = IT on (+\- TD)p(Latest known tax rates/laws) TE = CT DT
(MAT - CT) is to be finally added to TE as a special case
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AS 22 Accounting for Taxes on Income

As as 31st March PBT - AI Add: epreciation - A/c's Less: epreciation - IT Total Income - TI T -being epn differential CT -30% of IT T-30% of T Tax Exp.(CT- T) TE= IT on (AI+/-P )

1 100 20 30 90 -10

Computer Pur. value (Rs. In Crores) 50 2 3 4 100 100 100 12 7 12 5 2 100 102 102 0 2 2 31 1 30 30

epreciation Rate Tax Rate Co's Act IT Act 0% 60% 30% 5 6 7 8 9 10 100 100 100 100 100 100 1000 3 2 1 1 0 0 50 1 0 0 0 0 0 50 102 101 101 101 100 100 1000 2 1 1 1 0 0 0 30 0 30 30 30 0 30 30 30 0 30 30 30 300 0 0 30 300 30 300
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27 30 -3 0 30 30 30 30

31 31 30 1 1 0 30 30 30 30 30 30

AS 22 Accounting for Taxes on Income

(R 50 31 M c : c o o c' 1 100 0 5 10 30 0 0 5 5 6 100 1 0 11 1 5 0 6 5 6 3 100 4 100 4 0 13 0 0 5 o o' c 40% 5 100 3 0 14 1 0 5 30 3 1 c 60% 6 100 0 15 0 0 0 6 1 0 100 1 16 0 0 0 106 10 3 3 100 1 0 1 0 0 0 1 0 3

30% 100 0 0 1 0 0 10 100 1000 0 50 0 1 1 0 50 0 1 0 1000 0 0 30 0 30 30 3 0 4 4 45

43 c 40 (3 o c L : c o o c 43 c 10 o o co

1 5 0 0 101

o 30% of ( o (

6
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AS 22 Accounting for Taxes on Income

Case

ud

No 3
Y 2004 5 CT DT
TD D
}Difference
}is TD

A CL epo ed Accounting income of Rs 9 Crores o

he o ow ng da a a e p ov ded
Rs n Crores

a es ax no pa d un ng o Re urn o nco e Inco e ro exe p ed Gov onds Deprec a on as per ooks o Accoun s Deprecia ion as per Inco e Tax Ac Disa owance U s 4 A 3

3 00 2 00 5 00 10 00 1 00

+ + +

Compute
35% of 6 = 2 10 IT on TI TI = 9+3 2+5 10+1 = 6 C = D = 30% of 2 = 0 60 2 DT IT on + TD TD = [ 3+ 5 10 ] = 2 3 TE CT DT 2 10 0 60 or 2 10 + 0 60 = 2 70

1 CT

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AS 22 Accounting for Taxes on Income

AS - 22 - Taxes on Income

A STU Y S om a onof efe e Tax

3132 5 3132 (Amt in Rs.) 2393768 372917 2766685 1590784 802984 2393768

Deferred Tax Liability for earlier years Deferred Tax Liability for the current year

TD Liability: DT @ DT @ Relating to fixed asset: 31.3.2005 33.66% 31.3.2004 35.875% WDV as per Companies Act 29849597 20063103 WDV as per Income Tax. Act 21630092 13390579 8219505 6672524
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AS 22 Accounting for Taxes on Income

DTA v/s DTL

Accounting Income > Taxable Income
Create DTL

Accounting Income < Taxable Income

Reversal of DTL or Creation of DTA s.t PRUDENCE

Accounting Income = Taxable Income

Neither DTA nor DTL

Accounting Loss = Taxable Loss

Create DTA subject to PRUDENCE
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AS 22 Accounting for Taxes on Income

Scope of AS 22
Taxes on income include all domestic and foreign taxes, which are based on taxable income Does not cover Dividend Distribution Tax.

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AS 22 Accounting for Taxes on Income

Recognition of Deferred Tax Asset

Consideration of P DENCE is a must while recognizing DTA

DTA Arising due to Basis of ecognition Unabsorbed Business Virtual Certainty (Judgment) & & Depreciation Loss Convincing Evidence (Fact)
ASI 9

Other than above

easonable Certainty

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AS 22 Accounting for Taxes on Income

Re-Assessment v/s Review e-Assessment ( ight) elates to DTA Previously unrecognized eview (Duty) elates to DTA Previously recognized

Not a prior period item as per AS-5 unless it was a mistake

AS 22 does not mention review or re-assessment of DTL

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AS 22 Accounting for Taxes on Income

Transitional Provisions
On the first occasion, the enterprise should recognize, the deferred tax balance that has accumulated prior to adoption of this statement as DTA/DTL with the corresponding credit/charge to the revenue reserves. Non Corporate Entities Capital Account

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AS 22 Accounting for Taxes on Income

Presentation of DT Balance Sheet (ASI-7)

Share capital eserves Secured loans nsecured loans Deferred tax liability Total Fixed assets Investments Deferred tax asset Net Current Assets Total

PROFIT AND LOSS ACCOUNT

I. INCOME Gross Sales Less: Excise Duty Net Sales Other Income TOTAL - I II. EXPENDITURE Material Cost Employees' Remuneration & Benefits Manufacturing Expenses Repairs & Maintenance Selling, General & Administration Expenses Interest Depreciation TOTAL - II III. PROFIT BEFORE TAX (I-II) IV. Provision for Current Taxation Provision for Deferred Tax Provision for Fringe Benefit Tax V. Profit after Tax (III - IV)
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AS 22 Accounting for Taxes on Income

Disclosure
Break-up of major components of DTA / DTL to be disclosed. DTA and DTL to be set off if permissible under tax laws but to be shown separately otherwise. Evidence supporting the recognition of DTA to be disclosed, if an enterprise has nabsorbed Depreciation / Tax Losses to be carried forward.

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AS 22 Accounting for Taxes on Income

Presentation of CT - Para 27
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
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Accounting Standard 22
Accounting for Taxes on Income

ISSUES & LATEST DEVLOPMENTS

AS 22 Accounting for Taxes on Income

Timing Difference Ex..

Difference in net block of fixed assets between tax and accounts Difference in Depreciation due to Different rates / methods Pro rata treatment Vs. 180 days (in I year) Exchange fluctuation of FC liability incurred for FA purchase. - As-11(R) Vs. Sch.VI Vs. S. 43A p to Rs. 5000 assets write off under Companies Act Impairment Loss as per AS-28 Sale Proceeds Cr. to Block of Asset as per IT Act Vs. Profit / Loss on sale of FAs recognised in P&L A/c Purchase of Scientific Research Assets [35(2)]

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AS 22 Accounting for Taxes on Income

Timing Difference Ex.

Expenses Dr. to P & L A/c on accrual basis but allowed on actual payment.
Payments made without TDS, but disallowed for tax purposes u/s 40(a)(i) / (ia) and allowed when relevant tax is deducted & paid subsequently Expenditure /s 43B of Income Tax Act Provision for Gratuity u/s 40A(7) Provisions made in the P&L A/c in anticipation of liabilities allowed when liabilities crystallize
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AS 22 Accounting for Taxes on Income

Timing Difference Ex..

Provision for doubtful debts / advance Provision for warranties Preliminary expenses written off fully when incurred (U/s 35D) Expenses amortized in books of Accounts over a period of years but a shorter or longer period is allowable for tax purposes

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AS 22 Accounting for Taxes on Income

Permanent Difference Ex...

Amortization of goodwill considered as disallowable expense Personal expenditure disallowed by tax authorities Penalty (Not being compensatory) Payments disallowed U/s 40(A)(3) Donations disallowed U/s 80G Remuneration to partners disallowed U/s 40(b) Scientific research expenditure.(only weighted element) Exemptions u/s 10/10A/10B Deductions U/s 80IA / IB / IC Financial Lease - Circular No. 2 (dtd. 9th Feb 2001 post AS 19 tax position) Additional Depreciation on Revaluation
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AS 22 Accounting for Taxes on Income

Financial Implication of Deferred Tax:

(1) Effect of Deferred tax on Income Tax (2) Effect on Current Ratio (3) Affects Net Worth Thereby affecting - Limits under Companies Acceptance of Deposits Rules

- Eligibility to make investments

- Determination of Sickness for BIFR purposes

(4) Affects Debt -Equity Ratio and TOL / TNW (Double edged sword)
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AS 22 Accounting for Taxes on Income

(6)

Affects Net Profit Ratio (PAT/Net Sales)

(7) Affects EPS (8) Affects Dividend declaration - No specific reference in the Company Law on DT.
(PBT loss V PAT Profit position Impact on dividend and Audit report)

(9)

Affects Capital Adequacy Norms in case of banks (Tier-I & Tier-II Capital) - Capital to Risk Weighted Assets Ratio (CRAR)

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AS 22 Accounting for Taxes on Income

Issues relating to DTA / DTL:

(1) Accounting for Taxes on Income in case of an Amalgamation as per AS-14 (ASI 11) (2) Is it OK not to recognize DTL on the ground that the enterprise intends to carry out a major capital expansion programme in near future? (3) Is it OK not to recognize DTL on the ground that the company expects that there will be losses both for accounting and tax purposes in near future?
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AS 22 Accounting for Taxes on Income

Issues relating to DTA / DTL:

(4) Accounting for Taxes on Income in Interim Financial Reports as per AS-25 (5) Accounting for Taxes on Income in Consolidated Financial Statements as per AS21 ASI 26 : Total TE = TE in Parent Co + TE in Subsidiary Co. GC 18/2002 : DT in CFS = simple aggregation of DT balances across the group
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AS 22 Accounting for Taxes on Income

Issues relating to DTA / DTL:

(6) ASI 3: Accounting for Taxes on Income in the situations of Tax Holiday U/S 80-IA and 80-IB of the Income-tax Act, 1961 ASI 5: Accounting for Taxes on Income in the situation of Tax Holiday U/S 10A and 10B of the Income-tax Act,1961 ASI 4: Losses under the head Capital Gains ASI 6: Accounting for Taxes on Income in the context of S. 115JB of the Income-tax Act, 1961 AT credit whether Current Tax ?
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(7)

(8) (9)

AS 22 Accounting for Taxes on Income

o o of De pre iatio oo 3 281 211 1 8 119 89 67 38 28 21 16 12 9 7
fo f

f f @3 f *3 4 4 33 17 6 14 68 1 2 119 12 12 12 12 12 12 1 1 76 49 22 6)
1

2 3 4 6 7 8 9 1 11 12 13 14 1
No f

1 1 1 1 1 1 1 1 1 1 1 1 1 1

181 111 8 19 11) 33) ) 6 2) 72) 79) 84 ) 88) 91) 93 )

O) O) O) O) ) ) ) ) ) ) ) ) ) )

f 14 4 33 17 6 -3 -1 -1 -19 -22 27 27 27 27 27

-6 9

294 29 296 297 298

f o

24 ) 2 ) 26 ) 27) 28)

27

229) 4 6 @ 3 -6 9

14

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AS 22 Accounting for Taxes on Income

AS 22 Conclusion
- Increases transparency concept upheld atching / accrual - Tax effect Accounting - ensures that Tax Charge in
future accounting periods is not vitiated by Timing Differences

- Aligns our AS with global AS - Catch 22 standard - A Tough job for CAs certifying on DT.
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