ACCOUNTING STANDARD - 22

TAXES ON INCOME

J.P., KAPUR & UBERAI

SCOPESCOPE

J.P., KAPUR & UBERAI

APPLICABLE FROM:

01.04.2001 - Listed enterprises or in the process of issuing equity or debt securities

01.04.2002 - Companies not covered as above

01.04.2003 - All other enterprises.

DEFINITIONSDEFINITIONS

J.P., KAPUR & UBERAI

ACCOUNTING INCOME (LOSS)Net profit or loss for a period as per profit and loss statement.

TAXABLE INCOME (TAX LOSS)Income (loss) for a period determined in accordance with the tax laws.

TAXES ON INCOMETAXES ON INCOME

Accounting income and taxable income for a period are seldom the same.

 Differences between the two are on account of :

Permanent Differences Timing Differences

J.P., KAPUR & UBERAI

Permanent DifferencesPermanent Differences

J.P., KAPUR & UBERAI

Permanent differences are those which arise in one period and do not reverse subsequently

For e.g., an income exempt from tax or an expense that is not allowable as a deduction for tax purposes.

Timing DifferencesTiming Differences

Timing differences are those which arise in one period and are capable of reversal in one or more subsequent periods.

For e.g., Depreciation, Sales Tax , Bonus etc., U/s 43B

J.P., KAPUR & UBERAI

TREATMENTTREATMENT

ABC Ltd prepares accounts annually on 31st March. It bought a fixed asset for 150,000 in Ist year which is fully depreciable under Income Tax but has a useful life of 3 years as per books. Assuming that the annual profits for 3 years is 200,000.

Assuming a tax rate of 40%( no surcharge)It leads to a tax saving of 60,000 in Ist year as compared to IInd & IIIrd year. The treatment of Deffered Taxation will be as under:

contd….J.P., KAPUR & UBERAI

TREATMENTTREATMENT

Particulars I II IIIProfit before Depreciation 200 200 200Depreciation as per books 50 50 50Profit before taxes 150 150 150

Less: Tax Expense 20 80 80DEFFERED TAX 40 (20) (20)TOTAL 60 60 60Profit after Tax 90 90 90

DEFFERED TAX LIABILITY 40 20 0

J.P., KAPUR & UBERAI

RECOGNITIONRECOGNITION

For determining the net profit or loss for the period, current tax and deferred tax have to be included.

Deferred tax assets and liabilities are usually measured using the tax rates and tax laws for the time being in force.

Deferred tax assets should be recognised and carried forward only to the extent of the deferred taxes those are realisable in future.

J.P., KAPUR & UBERAI

MEASUREMENTMEASUREMENT

CURRENT TAXAt the amount that is expected to be paid to the taxation authorities.

DEFERRED TAX ASSETS AND LIABILITIES At the tax rates and tax laws that have been enacted at

the balance sheet date.

J.P., KAPUR & UBERAI

DISCLOSUREDISCLOSURE

Disclose major components of deferred tax assets and liabilities.

Deferred tax assets and liabilities should be distinguished from assets and liabilities representing current tax for the period

Disclose nature of evidence supporting recognition of deferred tax assets in the event of there being unabsorbed depreciation or carried forward losses.

J.P., KAPUR & UBERAI

Transitional ProvisionsTransitional Provisions

On first implementation of the standard, the net deferred tax balance accumulated prior to adoption of the standard should be adjusted against revenue reserves.

J.P., KAPUR & UBERAI