Taxes on Income    AS-22             By       Shankar Bose   Inspector of Income-tax        MSTU, Puri
Taxes on Income• Accounting income and taxable income for a  period are seldom the same• Differences between the two are o...
Permanent Differences• Permanent differences are those which arise  in one period and do not reverse  subsequently, e.g., ...
Timing Differences• Timing differences are those which arise in  one period and are capable of reversal in one  or more su...
Timing Differences•                      Year 1 Year 2 Year 3•   Profit before dep.  300    300     300•   Depreciation (S...
Timing differences• Timing differences cause a distortion in  computation of results of operations for a  period with cons...
Timing Differences• Examples of Timing differences:  – expenditure covered by section 43B of Income-tax    Act  – expendit...
Timing Differences• Examples of timing differences (contd.)  – differences in depreciation charge due to    differences in...
AS 22• AS 22 seeks to redress the distortions  caused by traditional method of accounting  for income-taxes (‘taxes payabl...
AS 22• Supersedes the earlier Guidance Note• Becomes mandatory in a phased manner
Date of Mandatory Application– Mandatory in respect of financial years  commencing April 1, 2001, for enterprises listed/i...
Date of Mandatory Application– In respect of all other enterprises, mandatory in  respect of accounting periods commencing...
Treatment of Taxes on Income• Tax expense (saving) should be included in  determining net income• Tax expense (saving) sho...
Recognition of Timing Differences• Deferred tax assets should be recognized  and carried forward only if their realization...
Recognition of Timing Differences• Unrecognized deferred tax assets need to be  re-assessed at each balance sheet date.  P...
Recognition of Timing Differences• Tax effect of accumulated timing differences  to be recalculated every year using tax r...
Review of Deferred Tax Assets• Carrying amount of deferred tax assets  should be reviewed at each balance sheet  date and ...
Disclosure• Assets and liabilities representing current tax  should be offset if:   – legal right of set off exists;   – a...
Disclosure• Assets and liabilities representing deferred  tax should be offset if:  – legal right of set off exists;  – as...
Disclosure• Disclose major components of deferred tax  assets and liabilities• Disclose nature of evidence supporting  rec...
Transitional Provisions• On first implementation of the standard, the  net deferred tax balance accumulated prior to  adop...
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As 22-bose

  1. 1. Taxes on Income AS-22 By Shankar Bose Inspector of Income-tax MSTU, Puri
  2. 2. Taxes 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
  3. 3. Permanent Differences• Permanent differences are those which arise in one period and do not reverse subsequently, e.g., an income exempt from tax or an expense that is not allowable as a deduction for tax purposes
  4. 4. Timing Differences• Timing differences are those which arise in one period and are capable of reversal in one or more subsequent periods.
  5. 5. Timing Differences• Year 1 Year 2 Year 3• Profit before dep. 300 300 300• Depreciation (SLM) 100 100 100• Profit before tax 200 200 200• Taxable Income NIL 300 300• Tax Provision(30%) NIL 90 90• Net Profit 200 110 110
  6. 6. Timing differences• Timing differences cause a distortion in computation of results of operations for a period with consequent effect on balance sheet if their future tax effects are not accounted for.
  7. 7. Timing Differences• Examples of Timing differences: – expenditure covered by section 43B of Income-tax Act – expenditure deferred in accounts but allowed fully for tax purposes in year of incurrence – provisions made in accounts but allowed for tax purposes only when liabilities actually crystallise in a subsequent year
  8. 8. Timing Differences• Examples of timing differences (contd.) – differences in depreciation charge due to differences in depreciable amount, depreciation rate or method, or the manner of calculating depreciation – income recognized in accounts but taxed in later years, e.g., interest accrued but not due on investments• Taxable v. Deductible timing differences
  9. 9. AS 22• AS 22 seeks to redress the distortions caused by traditional method of accounting for income-taxes (‘taxes payable method’) by requiring the adoption of deferred tax accounting in respect of timing differences• Timing differences v. Temporary differences
  10. 10. AS 22• Supersedes the earlier Guidance Note• Becomes mandatory in a phased manner
  11. 11. Date of Mandatory Application– Mandatory in respect of financial years commencing April 1, 2001, for enterprises listed/in the process of listing, and for all enterprises of a group where parent presents consolidated financial statements and any of the enterprises is listed/in the process of listing– In respect of companies not covered above, mandatory in respect of accounting periods commencing April 1, 2002
  12. 12. Date of Mandatory Application– In respect of all other enterprises, mandatory in respect of accounting periods commencing April 1, 2003– Can an enterprise apply the Standard from an earlier date?
  13. 13. Treatment of Taxes on Income• Tax expense (saving) should be included in determining net income• Tax expense (saving) should comprise – Current tax (I.e., provision for tax payable as computed traditionally), and – Tax effects of all timing differences, subject to consideration of prudence in recognition of deferred tax assets
  14. 14. Recognition of Timing Differences• Deferred tax assets should be recognized and carried forward only if their realization is reasonably certain, I.e., sufficient future taxable income is likely to be available for offset.• However, in the event of there being unabsorbed depreciation or carried forward tax losses, deferred tax assets can be recognized only if their realization is virtually certain based on convincing evidence
  15. 15. Recognition of Timing Differences• Unrecognized deferred tax assets need to be re-assessed at each balance sheet date. Previously unrecognized assets are to be recognized if reasonable/virtual certainty, as the case may be, of realization is now available
  16. 16. Recognition of Timing Differences• Tax effect of accumulated timing differences to be recalculated every year using tax rates and tax laws that have been enacted or substantially enacted• In case of slab rates, average rate to be used.• Discounting of deferred tax assets/liabilities not permitted
  17. 17. Review of Deferred Tax Assets• Carrying amount of deferred tax assets should be reviewed at each balance sheet date and to the extent the realization is not reasonably/virtually certain, the asset should be written down. Such write-down may be subsequently reversed to the extent realization becomes reasonably/virtually certain
  18. 18. Disclosure• Assets and liabilities representing current tax should be offset if: – legal right of set off exists; – assets and liabilities are intended to be settled on a net basis
  19. 19. Disclosure• Assets and liabilities representing deferred tax should be offset if: – legal right of set off exists; – assets and liabilities relate to taxes levied by same governing taxation laws• Deferred tax assets and liabilities to be distinguished from current tax, current assets and current liabilities and presented under a separate heading in balance sheet
  20. 20. Disclosure• Disclose major components of deferred tax assets and liabilities• Disclose nature of evidence supporting recognition of deferred tax assets in the event of there being unabsorbed depreciation or carried forward tax losses
  21. 21. Transitional 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
  22. 22. Thanks
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