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Accounting for taxes on income Accounting Standard 22 Presented by : Dr. Raj K. Agarwal M. Com. FCA, FCS, FICWA, LLB, P

Accounting for taxes on income Accounting Standard 22 Presented by : Dr. Raj K. Agarwal M. Com. FCA, FCS, FICWA, LLB, Phd . M/s Rakesh Raj & Associates Chartered Accountants. Applicability. In respect of All the companies. On or after 1-04-2006: - All other enterprises. Scope.

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Accounting for taxes on income Accounting Standard 22 Presented by : Dr. Raj K. Agarwal M. Com. FCA, FCS, FICWA, LLB, P

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  1. Accounting for taxes on income Accounting Standard 22 Presented by : Dr. Raj K. Agarwal M. Com. FCA, FCS, FICWA, LLB, Phd. M/s Rakesh Raj & Associates Chartered Accountants

  2. Applicability In respect of • All the companies. • On or after 1-04-2006: - All other enterprises.

  3. Scope Taxes covered • Taxes on income in India • Taxes on income overseas Dividend distribution tax not covered

  4. Concept Income Tax Charge shall Match the Incomes Disclosed in Books of Accounts Irrespective of Time When It is Payable As Per Income Tax Laws.

  5. Rationale • International practice • Accrual • Matching Concept • Prudence

  6. Difference Between Accounting and Taxable Income • Timing difference The differences between taxable and accounting income originating in one period and capable of reversal in subsequent period. For example, • Different dep. Rates • Disallowances u/s 43B allowable on payment basis • Permanent Differences The differences between taxable and accounting income originating in one period and not capable of reversal in subsequent period. For example, • Dividend income. • Weighted deduction allowed. • Disallowance u/s 40A(3).

  7. Recognition • Tax expense to be provided in the profit and loss account for the period not with respect to taxable income but with respect to accounting income as per matching concept.

  8. Tax Expense It shall consist of : Current tax - amount of income tax payable in respect of taxable income. + Deferred tax - tax effect of timing differences Tax expense may result into tax saving as well

  9. Result of Timing Differences Deferred tax assets- When Taxable Income is More or Deferred tax liability- When Book Income is More

  10. Deferred Tax Asset: Diminution in value of investment Lower Tax depreciation 43B disallowance Payment eligible for deduction u/s 35D/35DD, i.e. over a number of years Loss/unabsorbed depreciation Loss on sale of depreciable assets 40(a) disallowance Deferred Tax Liability: Higher tax depreciation Deferred revenue expenditure, fully tax deductible in current year Profit on sale of depreciable assets Timing Differences Give Rise to

  11. Permanent Difference • No Treatment under AS 22 • Examples • Capital expenditure (non-depreciable). • Personal expenditure. • Tax exemption u/s 10, 10A, 10B, etc. • Tax deduction under chapter VI A. • Income tax/wealth tax. • Disallowance u/s 40A(3). • Revaluation of income/write off. • Delay in deposit of provident fund, etc.

  12. Journal Entries • Tax expense (dr) 20 To current tax 20 (provision for tax payable on income of Rs 50@ 40%) • Tax expense (dr) 20 To deferred tax liability 20 (Deferred tax liability credited for originating timing difference due to depreciation excess allowed as per income tax computation of Rs 50@ 40%) • Deferred tax asset (dr) 12 To tax expense 12 (Being the deferred tax asset generated for originating timing difference of Rs 30@ 40%) `Net of Deferred Tax Liability and Deferred Tax Asset Rs 20-12= Rs 8 to Be Shown in Balance Sheet As Deferred Tax Liability.

  13. Example I As Per As Per Tax Timing Permanent Books Computation Difference Difference Profit before tax as 1000 1000 -- -- per P & L A/C Dividend Income 100 ---- --- 100 ------- -------- 1100 1000 ------- -------- Expenses 800 800 Depreciation 100 150 (-)50 Unpaid Excise Duty 20 --- 20 Provision For Gratuity 10 --- 10 -------- --------- ---------- ----------- 930 950 -20 -100 ------- --------- ---------- ------------ Profit Before Tax 170 50 -20 -100 Current Tax @40% -- 20 -- Deferred Tax on Timing Difference @40% -- -- 8 Tax Expense to be provided in P & L A/C 28 -- --- ----------- ---------- ---------- Profit after tax 142 -- --

  14. Example II Year Ending 31st Mar. 2004 As Per Books As Per Timing Computation Difference Profit before dep.. & tax 200 200 Depreciation 50 150 (-)100 -------- -------- -------- Profit before tax 150 50 -------- -------- -------- Current Tax @40% ---- 20 --- Deferred tax on timing difference --- --- 40 Tax Expense to be provided in P & L A/C 60 --- --- ---------- ----------- ----------- Profit after tax 90 --- -- ---------- ---------- ----------- CONTD….. `

  15. Example II Year Ending 31st Mar.2005 As Per As Per Timing Books Computation Difference Profit before dep.. & Tax 200 200 Depreciation 50 --- 50 -------- -------- -------- Profit before taxes 150 200 --------- --------- --------- Current Tax @40% ---- 80 --- Deferred Tax Liability Reversed on timing difference @40% -- ---- 20 Tax expense to be provided in P & L A/c 60 --- ---- -------- ---------- -------- Profit after tax 90 --- ---- ------- ---------- -------

  16. Unabsorbed depreciation and losses also timing differences 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.

  17. Concept of prudence • Recognition and carry forward of deferred tax asset only to the extent there is ‘reasonable certainty” that sufficient future taxable income will be available against which deferred tax asset can be realized. • In case of unabsorbed depreciation or carry forward of losses under tax laws, recognition if there is ‘virtual certainty with convincing evidences’, that sufficient future taxable income will be available against which deferred tax asset can be realized. • Reassessment of unrecognized deferred tax asset at each balance sheet date and review of deferred tax assets at each balance sheet date.

  18. Example III As Per BooksAs Per Tax Timing ComputationDifference Profit as per P& L 1000 1000 - Depreciation 400 1100 -700 ---------- ------------ ------------ Profit & loss 600 -100 100 ---------- ------------ ------------ Current Tax @ 40% -- Nil -- Deferred Tax liability on depreciation @40% -- -- -280 Deferred Tax Asset @40% for unabsorbed depreciation -- -- 40 Tax expense @40% - 240 -------- ------------ ------------- Profit after Tax 360 -- -240 ---------- ------------ ----------------

  19. Example IV As Per Books As Per Timing Difference Computation Profit as Per P&L A/C 100 100 --- Depreciation 400 1100 -700 ------- --------- ---------- Profit/Loss -300 -1000 1000 ------- --------- ----------- Current Tax ---- Nil ----- Deferred Tax liability ---- ----- 280 Deferred Tax Asset --- ---- 400 Tax Saving 120 --- (120) ------- -------- --------- Loss After Tax -180 -- -- ------- -------- ---------

  20. Measurement • Current Tax- Applicable rates and tax laws to be adopted • Deferred Tax- Rates and tax laws that have been enacted or substantively enacted by the balance sheet date to be adopted. • Discounting- DTA and DTL discounting neither required nor permissible. • Review- DTL and DTA to be restated every year as per applicable rates

  21. Presentation and Disclosure • Netting of deferred tax assets and liabilities on the face of Financial Statements. • To be shown separately from current assets and current liabilities in the balance sheet. • Breakup of deferred tax assets and liabilities into major components to be given in the notes to accounts. • Nature of evidences supporting the recognition if deferred tax assets recognized in case of losses.

  22. Certain Issues 1. When Financial Statements are Made on a Date Other Than 31st March2. MAT credit - whether DTA can be created

  23. Accounting Standard 22-impact 1. Impact on dividend paying capacity. 2. Impact on net worth/ debt equity ratio /current ratio for fund raising.

  24. ASIs in respect of AS 22 • ASI 2 - Accounting for taxes on income in situations of tax holidays u/s 80IA & 80IB • ASI 4- Losses under the head Capital Gains • ASI 5- Accounting for taxes on income in situations of tax holidays u/s 10A & 10B ` • ASI 6- Accounting for taxes on income in context of s. 115JB

  25. ASIs in respect of AS 22 ASI 7 - Disclosure of DTA and DTL in the balance sheet of the company ASI 9- Virtual certainty supported by evidence ASI 11- Accounting for taxes on income in case of amalgamation

  26. As per Accounting Standard (AS-22) “Accounting for taxes on income” issued by the Institute of Chartered Accountants of India, the major components of deferred tax assets and liabilities arising on account of timing differences are: EIL Annual Report 2003-04 Deferred tax assets amounting to Rs. 1538.62 lakhs as on March 31, 2004 (Rs. 1299.00Lakhs) has not been created on the amount of provision for doubtful debts and doubtful advances amounting to Rs. 4275.51 lakhs (Rs. 3609.06 lakhs) andRs. 8.32 lakhs (Rs. 11.84 Lakhs) respectively because it is not certain as to when and how much of these amount will be written off in the financial books since the Management still considers as recoverable.

  27. T H A N K Y O U

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