Accounting for taxes on income Accounting Standard 22 Presented by : CA. Rajeev Bansal ACA, D.I.S.A.(ICA) B. Com. M/s

1. Accounting for taxes on income Accounting Standard 22 Presented by : CA. Rajeev Bansal ACA, D.I.S.A.(ICA) B. Com. M/s Rajeev Lakshmi Bansal & Co. 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. 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. i.e. • Taxes on income are considered to be an expense incurred by the enterprises in earning income and are accrued in the same period as the revenue and expenses to which they relate. (Para 10 of AS - 22)

5. 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).

6. 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

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

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

9. 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 employee’s share in provident fund, etc.

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

11. 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 50 100 Current Tax @40% -- 20 -- Deferred Tax on Timing Difference (+)20 @40% -- -- (-) 12 Tax Expense to be provided in (+)8 P & L A/C 28 -- --- ----------- ---------- ---------- Profit after tax 142 -- --

12. 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….. `

13. 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 --- ---- ------- ---------- -------

14. 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.

15. 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. (Para 17 of AS – 22) • Reassessment of unrecognized deferred tax asset at each balance sheet date and review of deferred tax assets at each balance sheet date.

16. Example III As Per BooksAs Per Tax Timing ComputationDifference Profit as per P& L 1000 1000 - Depreciation 400 1100 700 ---------- ------------ ------------ Profit & loss 600 -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 ---------- ------------ ----------------

17. 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 ------- --------- ----------- Current Tax ---- Nil ----- Deferred Tax liability ---- ----- 280 Deferred Tax Asset --- ---- 400 Tax Saving 120 --- (120) ------- -------- --------- Loss After Tax (-)180 -- -- ------- -------- ---------

18. 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

19. 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.

20. Certain Issues 1. When Financial Statements are Made on a Date Other Than 31st March2. MAT Credit - whether DTA can be created3. In case DTA is not created - Whether AS-22 complied4. Whether for creating DTL - Principal of prudence may be applied.5. Disallowances during 143(3) Assessment.6. ‘Recoverable’ word in definition of timing differences.7. Profit/ Loss on sale of Assets - Whether timing difference.

21. Accounting Standard 22-impact 1. Impact on dividend paying capacity. 2. Impact on net worth/ debt equity ratio /current ratio for fund raising. 3. DTL not part of reserves/ Net worth.

22. Impact on Dividend Paying Capacity • A company has a profit of Rs. 100 crores before tax. Its current tax expense is Rs. 35 crores and deferred tax expense is Rs. 70 crores. Can the company declare a dividend out of its profit for the current year ?

23. Impact on Earning Per share • The company has incurred a loss of Rs. 2,00,000 in the year 2006 and made profit of Rs. 80,000 and 1,40,000 in year 2007 and year 2008 respectively. Assuming Tax rate is 35%. The average No. of equity shares outstanding as at the year end 2006 is 10,000. What is the basic earning/loss per share in 2006 :- • Rs. 13 or • Rs. 20. • ?

24. ASIs in respect of AS 22 • ASI 3 - 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. T H A N K Y O U