Accounting for taxes on Accounting for taxes on incomeincome

Accounting Standard 22Accounting Standard 22

Presented byPresented by : :

CA. Rajeev BansalCA. Rajeev BansalACA, D.I.S.A.(ICA) B. Com.ACA, D.I.S.A.(ICA) B. Com.

M/s Rajeev Lakshmi Bansal & M/s Rajeev Lakshmi Bansal & Co. Co.

Chartered AccountantsChartered Accountants

ApplicabilityApplicability

In respect ofIn respect of

All the companies.All the companies.

On or after 1-04-2006: - All other On or after 1-04-2006: - All other enterprises.enterprises.

ScopeScope

Taxes covered Taxes covered

Taxes on income in India Taxes on income in India Taxes on income overseasTaxes on income overseas

Dividend distribution tax not Dividend distribution tax not coveredcovered

RecognitionRecognition

Tax expense to be provided in the profit and Tax expense to be provided in the profit and

loss account for the period not with respect to loss account for the period not with respect to

taxable income but with respect to accounting taxable income but with respect to accounting

income as per matching concept. income as per matching concept. i.e. i.e.

Taxes on income are considered Taxes on income are considered to be an to be an

expenseexpense incurred by the enterprises in incurred by the enterprises in

earning income and are accrued in the same earning income and are accrued in the same

period as the revenue and expenses to which period as the revenue and expenses to which

they relate. they relate. (Para 10 of AS - 22)(Para 10 of AS - 22)

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Difference Between Accounting Difference Between Accounting and Taxable Incomeand Taxable Income

Timing differenceTiming difference

The differences between The differences between taxable and accounting taxable and accounting income originating in income originating in one period and capable one period and capable of reversal in of reversal in subsequent period. For subsequent period. For example,example,

Different dep. RatesDifferent dep. Rates

Disallowances u/s 43B Disallowances u/s 43B allowable on payment allowable on payment basisbasis

Permanent Permanent DifferencesDifferences

The differences between The differences between taxable and accounting taxable and accounting income originating in one income originating in one period and not capable of period and not capable of reversal in subsequent reversal in subsequent period. For example,period. For example,

Dividend income.Dividend income.

Weighted deduction allowed.Weighted deduction allowed.

Disallowance u/s 40A(3).Disallowance u/s 40A(3).

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Tax ExpenseTax 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

Result of Timing Result of Timing DifferencesDifferences

Deferred tax liabilityDeferred tax liability-- When Book Income is When Book Income is MoreMore

oror

Deferred tax assetsDeferred tax assets-- When Taxable When Taxable Income Income is Moreis More

Timing Differences Give Rise toTiming Differences Give Rise to Deferred Tax Asset:Deferred Tax Asset: Lower Tax depreciation Lower Tax depreciation

(As Per I.T.)(As Per I.T.) 43B disallowance43B disallowance Loss on sale of Loss on sale of

depreciable assetsdepreciable assets Loss/unabsorbed Loss/unabsorbed

depreciationdepreciation Provision for Provision for

retirement benefits retirement benefits allowable on payment allowable on payment basis.basis.

Diminution in value of Diminution in value of investmentinvestment

Payment eligible for Payment eligible for deduction u/s deduction u/s 35D/35DD, i.e. over a 35D/35DD, i.e. over a number of yearsnumber of years

40(a) disallowance 40(a) disallowance

Deferred Tax Liability:Deferred Tax Liability:

Higher tax Higher tax depreciation (AS Per depreciation (AS Per I.T.)I.T.)

Deferred revenue Deferred revenue

expenditure, fully tax expenditure, fully tax deductible in current deductible in current yearyear

Profit on sale of Profit on sale of depreciable assetsdepreciable assets

Permanent DifferencePermanent Difference

No Treatment under AS 22No Treatment under AS 22

ExamplesExamples

Capital expenditure (non-depreciable).Capital expenditure (non-depreciable). Personal expenditure.Personal expenditure. Tax exemption u/s 10, 10A, 10B, etc.Tax exemption u/s 10, 10A, 10B, etc. Tax deduction under chapter VI A.Tax deduction under chapter VI A. Income tax/wealth tax.Income tax/wealth tax. Disallowance u/s 40A(3).Disallowance u/s 40A(3). Revaluation of income/write off.Revaluation of income/write off. Delay in deposit of employee’s share in provident Delay in deposit of employee’s share in provident

fund, etc.fund, etc.

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RationaleRationale

International practiceInternational practice

AccrualAccrual

Matching ConceptMatching Concept

PrudencePrudence

Example IAs 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 -- --

Example II

Year Ending 31st Mar. 2004As 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…..

`

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 --- ---- ------- ---------- -------

Unabsorbed depreciation and losses also Unabsorbed depreciation and losses also timing differencestiming differences

Unabsorbed depreciation and carry Unabsorbed depreciation and carry forward of losses which can be set off forward of losses which can be set off against future taxable income are also against future taxable income are also considered as timing differences and considered as timing differences and result in deferred tax assets, subject result in deferred tax assets, subject to consideration of prudence.to consideration of prudence.

Concept of Concept of prudenceprudence

Recognition and carry forward of deferred tax asset Recognition and carry forward of deferred tax asset only to the extent there is ‘only to the extent there is ‘reasonable certaintyreasonable certainty”” that sufficient future taxable income will be that sufficient future taxable income will be available against which deferred tax asset can be available against which deferred tax asset can be realized. realized.

In case of unabsorbed depreciation or carry In case of unabsorbed depreciation or carry forward of losses under tax laws, recognition if forward of losses under tax laws, recognition if there is there is ‘‘virtual certainty with convincing virtual certainty with convincing evidences’evidences’, that sufficient future taxable income , that sufficient future taxable income will be available against which deferred tax asset will be available against which deferred tax asset can be realized. can be realized. (Para 17 of AS – 22)(Para 17 of AS – 22)

Reassessment of unrecognized deferred tax Reassessment of unrecognized deferred tax asset at each balance sheet date and review asset at each balance sheet date and review of deferred tax assets at each balance sheet of deferred tax assets at each balance sheet date.date.

Example III

As Per Books As Per Tax Timing

Computation DifferenceProfit 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

---------- ------------ ----------------

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 -- --

------- -------- ---------

MeasurementMeasurement Current TaxCurrent Tax-- Applicable rates and tax Applicable rates and tax

laws to laws to be adopted be adopted

Deferred TaxDeferred Tax--Rates and tax laws that have Rates and tax laws that have been enacted or substantively been enacted or substantively

enacted by the balance enacted by the balance sheet sheet date to be adopted.date to be adopted.

DiscountingDiscounting-- DTA and DTL discounting DTA and DTL discounting neither required nor neither required nor

permissible.permissible.

Review-Review- DTL and DTA to be DTL and DTA to be restated restated every year as every year as per applicable per applicable ratesrates

Presentation and Presentation and DisclosureDisclosure

Netting of deferred tax assets and Netting of deferred tax assets and liabilities on the face of Financial liabilities on the face of Financial Statements.Statements.

To be shown separately from current assets To be shown separately from current assets and current liabilities in the balance sheet.and current liabilities in the balance sheet.

Breakup of deferred tax assets and Breakup of deferred tax assets and liabilities into major components to be liabilities into major components to be given in the notes to accounts.given in the notes to accounts.

Nature of evidences supporting the Nature of evidences supporting the recognition if deferred tax assets recognition if deferred tax assets recognized in case of losses.recognized in case of losses.

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1.1. When Financial Statements are Made on When Financial Statements are Made on a a Date Other Than 31st MarchDate Other Than 31st March

2. MAT Credit - whether DTA2. MAT Credit - whether DTA can be created can be created

3. In case DTA is not created - Whether 3. In case DTA is not created - Whether AS-22 AS-22

compliedcomplied 4. Whether for creating DTL - Principal of 4. Whether for creating DTL - Principal of prudence prudence may be may be applied.applied.

5. Disallowances during 143(3) Assessment.5. Disallowances during 143(3) Assessment.

6. ‘Recoverable’ word in definition of timing differences.6. ‘Recoverable’ word in definition of timing differences.

7. Profit/ Loss on sale of Assets - Whether timing 7. Profit/ Loss on sale of Assets - Whether timing difference.difference.

Certain IssuesCertain Issues

Accounting Standard 22-impactAccounting Standard 22-impact

1.1. Impact on dividend paying capacity.Impact on dividend paying capacity.

2.2. Impact on net worth/ debt equity Impact on net worth/ debt equity ratio /current ratio for fund raising.ratio /current ratio for fund raising.

3. DTL not part of reserves/ Net worth.3. DTL not part of reserves/ Net worth.

Impact on Dividend Paying Impact on Dividend Paying CapacityCapacity

A company has a profit of Rs. 100 A company has a profit of Rs. 100 crores before tax. Its current tax crores before tax. Its current tax expense is Rs. 35 crores and deferred expense is Rs. 35 crores and deferred tax expense is Rs. 70 crores. Can the tax expense is Rs. 70 crores. Can the company declare a dividend out of its company declare a dividend out of its profit for the current yearprofit for the current year

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Impact on Earning Per Impact on Earning Per shareshare

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

Rs. 13 orRs. 13 or Rs. 20.Rs. 20.

??

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ASIs in respect of AS 22ASIs in respect of AS 22

ASI 3 -ASI 3 - Accounting for taxes on Accounting for taxes on income income in situations of tax in situations of tax holidays u/s holidays u/s 80IA & 80IB80IA & 80IB

ASI 4-ASI 4- Losses under the head Losses under the head Capital Capital GainsGains

ASI 5-ASI 5- Accounting for taxes on Accounting for taxes on income income in situations of tax in situations of tax holidays u/s holidays u/s 10A & 10B10A & 10B

`̀ ASI 6-ASI 6- Accounting for taxes on Accounting for taxes on

income income in context of s. 115JBin context of s. 115JB

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ASIs in respect of AS 22ASIs in respect of AS 22

ASI 7 -ASI 7 - Disclosure of DTA and DTL in Disclosure of DTA and DTL in the the balance sheet of the balance sheet of the companycompany

ASI 9-ASI 9- Virtual certainty supported Virtual certainty supported by by evidenceevidence

ASI 11-ASI 11- Accounting for taxes on Accounting for taxes on income income in case of amalgamationin case of amalgamation

T H A N K Y O UT H A N K Y O U