21 as 22 on Deferred Taxation

8/6/2019 21 as 22 on Deferred Taxation

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Deferred Taxation AS 22 and

Latest Developments


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AS 22 Accounting for Taxes on IncomeAS 22 Accounting for Taxes on Income

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Accounting Standard means the standard ofaccounting:

Recommendedby ICAI and

Prescribedby Government inConsultation with the NACAS constituted u/s

210A(1) of the Companies Act, 1956.

Accounting Standardsu/s.211(3c)(wef 31.10.1998)


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Deviation from AS4.(d) In our opinion, the Balance Sheet, P&L Account and theCash Flow Statement dealt with by this report comply withthe AS referred to in Sec. 211(3C) of the Companies Act,1956 subject to the following observations:

Certain Transactions are accounted on cash basis videsignificant 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 10on Fixed Assets. Certain transaction accounted under this policy

has the effect ofoverstating 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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Companies listed and in the process of listing in India -

including Group companies.

01.04.2001

In respect of other companies notcovered above.

01.04.2002

In respect of all other enterprises. 01.04.2004

01.04.2006

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


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Deferred Taxes are Income Tax which

arise in one periodbut because ofTiming

Difference will have to be actually paid in

later years.

Deferred Tax


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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 oneperiod and do not reverse subsequently.


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Deferred Tax

Current Tax(applicable rate/law)

Deferred Tax

(substantively enactedrates /law)Average rate ?

No Tax effect

Tax

Expense

Taxable

IncomeAs per IT ReturnRs. 70 cr

Timing

Difference

Rs. 20 cr

Permanent

DifferenceRs. 10 cr

Accounting

IncomeAs per P&L A/c

Rs. 100 cr


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Deferred Tax

Current Tax

Taxable

IncomeAs per IT Return

Rs. 90 cr

Accounting

IncomeAs per P&L A/c

Rs. 80 cr

Timing

Difference Reversal or DTA

Rs. 20 cr

(DTL)or

DTAPrudence

Permanent

DifferenceRs. 10 cr

No Tax effect


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STI

AI

+/- PD+/- TD

TI

CT = IT on TIp (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

Computation of DT


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1 Computer Pur. value Tax Rate

(Rs. In Crores) Co's Act IT Act50 0% 60% 30%

As as 31st March 1 2 3 4 5 6 7 8 9 10

PBT - AI 100 100 100 100 100 100 100 100 100 100 1000

Add: epreciation - A/c's 20 12 7 3 2 1 1 0 0 50

Less: epreciation - IT 30 12 5 2 1 0 0 0 0 0 50

Total Income - TI 90 100 102 102 102 101 101 101 100 100 1000

T -being epn differential -10 0 2 2 2 1 1 1 0 0 0

CT -30% of IT 27 30 31 31 31 30 30 30 30 30 300T-30% of T -3 0 1 1 1 0 0 0 0 0 0

Tax Exp.(CT- T) 30 30 30 30 30 30 30 30 30 30 300

TE= IT on (AI+/-P ) 30 30 30 30 30 30 30 30 30 30 300

epreciation Rate


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AS - 22 - Taxes on Income

AS STU Y -om a on of efe e Tax 3132 5 3132

Deferred Tax Liability for earlier years 2393768 1590784

Deferred Tax Liability for the current year 372917 802984

2766685 2393768

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

(Amt in Rs.)


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Accounting Income > Taxable Income

Create DTL

Accounting Income < Taxable IncomeReversal 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

DTA v/s DTL


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Scope of AS 22Taxes on income include all domestic and

foreign taxes, which are based on taxable

income

Does not cover Dividend Distribution Tax.


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Recognition of Deferred Tax AssetConsideration ofP DENCE is a must while recognizing DTA

DTAArising due to Basis of ecognitionUnabsorbed Business

& Depreciation Loss

Virtual Certainty (Judgment) &

Convincing Evidence (Fact)

ASI 9

Other than above easonable Certainty


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

AS 22 does not mention review or re-assessment ofDTL

Re-Assessment v/s Review

e-Assessment

( ight)

eview

(Duty)

elates to DTA

Previously unrecognized

elates to DTA

Previously recognized


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Transitional ProvisionsOn the first occasion, the enterprise should

recognize, the deferred tax balance that has

accumulated prior to adoption of this statementas DTA/DTL with the corresponding

credit/charge to the revenue reserves.

Non Corporate Entities Capital Account


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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 Salesess: xc se u y

Net Sales

Other Income

TOTAL - I

II. EXPENDITURE

Material Cost

Employees' Remuneration & Benefits

Manufacturing Expenses

Repairs & Maintenancee ng, enera m n strat on xpenses

Interest

DepreciationTOTAL - 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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Break-up of major components of DTA / DTL to

be disclosed.

DTA and DTL to be set off if permissible undertax 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.

Disclosure


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Presentation ofC

T - Para 27An Enterprise should offset assets and

liabilities representing current tax if the

enterprise

a) has a legally enforceable right to set off

the recognized amounts; andb) intends to settle the asset and the

liability on a net basis


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Accounting Standard 22

Accounting for Taxes onIncome

ISSUES

&

LATEST DEVLOPMENTS


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Difference in net block of fixed assets between taxand 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 FApurchase. - As-11(R) Vs. Sch.VI Vs. S. 43A

p to Rs. 5000 assets write off under Companies Act

Impairment Loss as per AS-28Sale 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)]

Timing Difference Ex..


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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

Timing Difference Ex.


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Provision for doubtful debts / advance

Provision for warranties

Preliminary expenses written off fully whenincurred (U/s 35D)

Expenses amortized in books of Accounts

over a period of years but a shorter orlonger period is allowable for tax purposes

Timing Difference Ex..


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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/10BDeductions U/s 80IA / IB / IC

Financial Lease - Circular No. 2 (dtd. 9th Feb 2001 post AS 19tax position)

Additional Depreciation on Revaluation

Permanent Difference Ex...


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FinancialImplication 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 BIFRpurposes

(4) Affects Debt -Equity Ratio and TOL / TNW

(Double edged sword)


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(6) Affects Net Profit Ratio (PAT/Net Sales)

(7) Affects EPS

(8) Affects Dividend declaration - No specificreference 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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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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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 AS-

21

ASI26 : Total TE = TE in Parent Co + TE in

Subsidiary Co. GC18/2002: DT in CFS = simple aggregation

ofDT balances across the group


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Issues relating to DTA / DTL:(6) ASI 3: Accounting for Taxes on Income in the

situations ofTax Holiday U/S80-IA and 80-IB of theIncome-tax Act, 1961

(7) ASI 5: Accounting for Taxes on Income in thesituation ofTax Holiday U/S 10A and 10B of theIncome-tax Act,1961

(8) ASI 4: Losses under the head Capital Gains

(9) ASI 6: Accounting for Taxes on Income in thecontext ofS. 115JB of the Income-tax Act, 1961

AT credit whether Current Tax ?


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AS 22 C

onclusion- Increases transparency atching / accrualconcept upheld

- Tax effect Accounting - ensures that Tax Charge infuture accounting periods is not vitiated by TimingDifferences

- Aligns our AS with global AS

- Catch 22 standard

- A Tough job for CAs certifying on DT.

21 as 22 on Deferred Taxation

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