WORKSHOP ON DEFERRED TAXATION

CONCEPT, CLARITY & IMPLEMENTATION.

HARSH N.GANDHIREG. NO.:-WRO0279965

GMCS BATCH NO.5, JAN.2012

DEFERRED TAX (AS-22, IAS-12)• MEANING• TYPES OF DIFFERENCES• TAX ON SUCH DIFFERENCES• DEFINITIONS• RECOGNITION• EXPLANATION• SOME EXTRA POINTS• DISCLOSURE IN THE NOTES TO

ACCOUNTS

MEANING OF DEFERRED TAX

WHAT IS DEFERRED TAX?????OXFORD DICTIONARY MEANING:-

“PUT OFF TO A LATER TIME”

IN HINDI:-

“BAADME KARNA ”

BUT AS PER AS-22, “ACCOUNTING FOR TAXES ON INCOME”

“Deferred Taxes are ‘Income Tax’ which arise in one period but because of Timing Difference will have to be actually paid in later years.”

TYPES OF DIFFERENCES

TIMING DIFFERENCE

Differences between Taxable Income & Accounting Income for a period that originate in one period & are capable of reversal in one or more subsequent periods.

Examples:-

PERMANENT DIFFERENCE

Differences between TaxableIncome & Accounting Incomefor a period that originates in one period and do not reverse subsequently.

Examples:-

Examples of Timing difference:-• Difference in net block of fixed assets between tax and

accounts - Difference in Depreciation due to

• Different rates / methods• Pro rata treatment Vs. 180 days (in 1 year)• Exchange fluctuation of FC liability incurred for FA

purchase. - As-11(R) Vs. Sch.VI Vs. S. 43A • Up to Rs. 5000 assets write off under Companies

Act• Impairment Loss as per AS-28• Sale Proceeds Cr. to Block of Asset as per IT Act Vs.

Profit / Loss on sale of FA’s recognized in P&L A/c• Purchase of Scientific Research Assets [35(2)]

Examples of Timing difference:-• 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 U/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.• Provision for doubtful debts / advance • Provision for warranties• Preliminary expenses written off fully when incurred (U/s

35D)

Examples of Timing difference:-• Provision for doubtful debts / advance • Provision for warranties• Preliminary expenses written off fully when incurred (U/s

35D)• Expenses amortized in books of Accounts over a period of

years but a shorter or longer period is allowable for tax purposes

• 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

Examples of Permanent difference:-• 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/10B• Deductions U/s 80IA / IB / IC • Financial Lease - Circular No. 2 (dtd. 9th Feb 2001 – post AS

19 tax position)• Additional Depreciation on Revaluation

DEFERRED TAX ON TIMING DIFFERENCES• CREATION OF DEFERRED TAX LIABILITY

Deferred Tax Liability is recognized for temporary differences that will result in taxable amounts in future years.

Ex:- A Temporary Difference is created between the depreciation as per the books of a/c’s & the depreciation under the Income Tax Laws which in initial years is higher than depreciation claimed as expense in the Financial Statements. This would lead to higher taxable income in the future.

DEFERRED TAX ON TIMING DIFFERENCES• CREATION OF DEFERRED TAX ASSET

Deferred Tax Asset is recognized for temporary differences that will result in deductible amounts in future years and for carry forward.

Ex:- A Temporary difference is created between the reported amount and the tax basis of a liability for estimated expenses as for tax purpose, those estimated expenses are not deductible until a future year. Settlement of that liability will result in tax deduction in future years, and a deferred tax asset is recognized in the current year for the reduction in taxes payable in future years.

Prudence for Recognizing Deferred Tax Asset• Deferred Tax Liability should be measured for all timing differences.

• Deferred Tax Asset should be recognized only to the extent it is reasonably certain that there will be sufficient future income to recover such Deferred tax Asset.

Ex:- If a Company is suffering heavy losses year after year & if it is affecting the Going concern assumption in the

organization, then recognizing Deferred Tax Asset wont be viable.

• Unabsorbed Depreciation & Carry forward of losses Since there is 8 year limit for c/f of business loss & unabsorbed depreciation in Indian tax law recognition of the deferred tax asset. To recognize deferred tax assets on this account there should be convincing evidence that sufficient taxable income will be available against which such deferred tax assets can be realized.

VIRTUAL CERTAINITY HONA CHAHIYE (i.e. Almost certain with Conclusive Evidence)

LETS’ GO THROUGH THE POSSIBLE CASES WHERE DTA / DTL ARISES…1. Accounting Profit > Income Tax Profit

2. Accounting Profit < Income Tax Profit

3. Accounting Profit & Income Tax Loss

4. Accounting Loss & Income Tax Profit

5. Accounting Loss > Income Tax Loss

6. Accounting Loss < Income Tax Loss

1.ACCOUNTING PROFIT > INCOME TAX PROFIT

• IF TAX WAS CALCULATED ON ACCOUNTING PROFIT THE TAX CALCULATED WOULD HAVE BEEN MORE.

• TAX CALCULATED ON INCOME TAX PROFIT ON ACCOUNT OF TIMING DIFFERENCES IS LESS THAN THAT OF TAX CALCULATED ON ACCOUNTING PROFIT.

• HENCE A LIABILITY OF TAX SAVINGS IS MADE IN THE CURRENT YEAR BUT IT WILL RESULT IN FUTURE TAX LIABILITY ON ACCOUNT OF TIMING DIFFERENCES.

• HENCE IT WOULD RESULT IN DEFERRED TAX LIABILITY.

• Deferred Tax Calculation = {75,000-50,000 / 4,50,000-4,25,000}* 30.90%

= Rs.7,725/-

EXAMPLE:-ACCOUNTING PROFIT INCOME TAX PROFIT5,00,000 5,00,00050,000 75,0004,50,000 4,25,000

2.ACCOUNTING PROFIT < INCOME TAX PROFIT

• IF TAX WAS CALCULATED ON ACCOUNTING PROFIT THE TAX CALCULATED WOULD HAVE BEEN LESS.

• TAX CALCULATED ON INCOME TAX PROFIT ON ACCOUNT OF TIMING DIFFERENCES IS MORE THAN THAT OF TAX CALCULATED ON ACCOUNTING PROFIT.

• HENCE MORE TAX IS PAID ON PROFIT WHICH WILL RESULT IN MORE TAX MADE IN THE CURRENT YEAR.

• HENCE IT WOULD RESULT IN DEFERRED TAX ASSET.

• Deferred Tax Calculation = {75,000-50,000 / 4,50,000-4,25,000}* 30.90%

= Rs.7,725/-

EXAMPLE:-ACCOUNTING PROFIT INCOME TAX PROFIT5,00,000 5,00,00075,000 50,0004,25,000 4,50,000

3.ACCOUNTING PROFIT & INCOME TAX LOSS

• IF TAX WAS CALCULATED ON ACCOUNTING PROFIT THERE WOULD EXIST SOME LIABILITY TO PAY TAX.

• BUT TAX CALCULATED ON INCOME TAX PROFIT ON ACCOUNT OF TIMING DIFFERENCES IS NIL AS THER EXIST A LOSS.

• HENCE A LIABILITY OF TAX SAVINGS IS MADE IN THE CURRENT YEAR BUT IT WILL RESULT IN FUTURE TAX LIABILITY ON ACCOUNT OF TIMING DIFFERENCES.

• HENCE IT WOULD RESULT IN DEFERRED TAX LIABILITY & ASSET.

• Deferred Tax Calculation = {5,25,000- 4,50,000 / (25,000)-50,000}* 30.90%

= Rs.23,175/- & Rs.25,000 * 30.90% = Rs.7,725/-

EXAMPLE:-ACCOUNTING PROFIT INCOME TAX LOSS5,00,000 5,00,0004,50,000 5,25,00050,000 (25,000)

4.ACCOUNTING LOSS & INCOME TAX PROFIT

• IF TAX WAS CALCULATED FROM ACCOUNTING POINT OF VIEW THE TAX CALCULATED WOULD HAVE BEEN NIL.

• TAX CALCULATED ON INCOME TAX PROFIT ON ACCOUNT OF TIMING DIFFERENCES RESULTS IN LIABILITY TO PAY TAX.

• THIS IMPLIES THAT EVEN IF THERE IS LOSS AS PER ACCOUNTS, STILL WE ARE PAYING TAX.

• HENCE IT WOULD RESULT IN DEFERRED TAX ASSET.

• Deferred Tax Calculation = {4,25,000-5,50,000 / 75,000-(50,000)}* 30.90%

= Rs.38,625/-

EXAMPLE:-ACCOUNTING LOSS INCOME TAX PROFIT5,00,000 5,00,0005,50,000 4,25,000(50,000) 75,000

5.ACCOUNTING LOSS > INCOME TAX LOSS

• TAX SAVINGS WILL BE LOWER IN EARLIER YEARS AS PER TAX LAWS. HOWEVER IT WILL BE MORE AS PER ACCOUNTING TREATMENT.

• THUS TAX ON INCOME TAX PROFIT WILL BE MORE AS COMPARED TO ACCOUNTING POINT OF VIEW.

• HENCE IT WOULD RESULT IN DEFERRED TAX ASSET & ASSET

• Deferred Tax Calculation = Rs.(6,25,000-6,50,000)/(1,25,000-1,50,000)* 30.90%

= Rs. 7,725/- & Rs. 6,25,000 * 30.9% = Rs.1,93,125/-

EXAMPLE:-ACCOUNTING INCOME TAX

(5,00,000) (5,00,000)(1,50,000) (1,25,000)(6,50,000) (6,25,000) 7,00,000 (In Future)

7,00,000 (In Future)

50,000 75,000

6.ACCOUNTING LOSS < INCOME TAX LOSS

• TAX SAVINGS WILL BE HIGHER IN EARLIER YEARS AS PER TAX LAWS. HOWEVER IT WILL BE LESS AS PER ACCOUNTING TREATMENT.

• THUS TAX ON ACCOUNTING PROFIT WILL BE MORE AS COMPARED TO INCOME TAX POINT OF VIEW.

• HENCE IT WOULD RESULT IN DEFERRED TAX LIABILITY & ASSET

• Deferred Tax Calculation = Rs.(150,000-1,25,000)/(6,50,000-6,25,000)* 30.90%

= Rs.7,725/- & Rs.6,50,000 * 30.9% = Rs.2,00,850/-

EXAMPLE:-ACCOUNTING INCOME TAX

(5,00,000) (5,00,000)(1,25,000) (1,50,000)(6,25,000) (6,50,000) 7,00,000 (In Future) 7,00,000 (In Future) 75,000 50,000

EXPLANATIONS ADDED TO AS-22 W.R.T. 80-IA,80-IB, 10A & 10B.

Deferred tax Recognized as a result of timing differences which Reverses.

• During the Tax Holiday Period:-Should not be recognized to the extent Gross

Total Income is subject to such Deduction.

• After the Tax Holiday Period:-Should be recognized in the year in which

Timing Differences originate.

• When to Re-assess unrecognized Deferred Tax Asset???

At every balance sheet date.

• Which rate of tax should be used to calculate Deferred Tax???

Basis of regular tax rate applicable for the subsequent relevant year known at the balance sheet date.

Not the rates under 115JB of the Income Tax Act.

• Review of Deferred Tax Asset???

Should be reviewed at each Balance Sheet date. If it is evident that any portion of the deferred tax asset is not

recoverable because of uncertainty of future income, the deferred tax asset should be written down.

Any such written down amount may be reversed in subsequent period to the extent that it becomes reasonably certain that sufficient future taxable income will be available.

• DISCLOSURE

DEFERRED TAX LIABILITY & ASSET ARE GENERALLY NET OFF IN THE FINANCIAL STATEMENTS.

EXCL:- HOLDING & SUBSIDARY COMPANIES.

DEFERRED TAX LIABILITY IS PRESENTED UNDER NON-CUURENT LIABILITIES IN THE NEW SCHEDULE VI FORMAT.

DEFERRED TAX ASSET IS PRESENTED UNDER NON-CUURENT ASSETS IN THE NEW SCHEDULE VI FORMAT.

DIFFERENCE BETWEEN AS-22 & IAS-12

• As per AS-22 Deferred tax Asset to be recognized to the extent there is reasonable or virtual certainty.

• As per IAS-12 Deferred tax Asset is recognized to the extent it is probable that the enterprise will have sufficient taxable

profit.

SOURCES:-

• Google• Books on Accounting Standards• D.S.Rawat• CA Club India• Experts• Friends• and much of my brain….

THANK YOU!!!AND

ALL THE BEST EVERYONE!!!