As 22


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As 22

  1. 1. Taxes on Income (AS 22)
  2. 2. Taxes on Income <ul><li>Accounting income and taxable income for a period are seldom the same </li></ul><ul><li>Differences between the two are on account of: </li></ul><ul><ul><li>Permanent Differences </li></ul></ul><ul><ul><li>Timing Differences </li></ul></ul>
  3. 3. Permanent Differences <ul><li>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 </li></ul>
  4. 4. Timing Differences <ul><li>Timing differences are those which arise in one period and are capable of reversal in one or more subsequent periods. </li></ul>
  5. 5. Timing Differences <ul><li>Year 1 Year 2 Year 3 </li></ul><ul><li>Profit before dep. 300 300 300 </li></ul><ul><li>Depreciation (SLM) 100 100 100 </li></ul><ul><li>Profit before tax 200 200 200 </li></ul><ul><li>Taxable Income NIL 300 300 </li></ul><ul><li>Tax Provision(30%) NIL 90 90 </li></ul><ul><li>Net Profit 200 110 110 </li></ul>
  6. 6. Timing differences <ul><li>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. </li></ul>
  7. 7. Timing Differences <ul><li>Examples of Timing differences: </li></ul><ul><ul><li>expenditure covered by section 43B of Income-tax Act </li></ul></ul><ul><ul><li>expenditure deferred in accounts but allowed fully for tax purposes in year of incurrence </li></ul></ul><ul><ul><li>provisions made in accounts but allowed for tax purposes only when liabilities actually crystallise in a subsequent year </li></ul></ul>
  8. 8. Timing Differences <ul><li>Examples of timing differences (contd.) </li></ul><ul><ul><li>differences in depreciation charge due to differences in depreciable amount, depreciation rate or method, or the manner of calculating depreciation </li></ul></ul><ul><ul><li>income recognized in accounts but taxed in later years, e.g., interest accrued but not due on investments </li></ul></ul><ul><li>Taxable v. Deductible timing differences </li></ul>
  9. 9. AS 22 <ul><li>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 </li></ul><ul><li>Timing differences v. Temporary differences </li></ul>
  10. 10. AS 22 <ul><li>Supersedes the earlier Guidance Note </li></ul><ul><li>Becomes mandatory in a phased manner </li></ul>
  11. 11. Date of Mandatory Application <ul><ul><li>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 </li></ul></ul><ul><ul><li>In respect of companies not covered above, mandatory in respect of accounting periods commencing April 1, 2002 </li></ul></ul>
  12. 12. Date of Mandatory Application <ul><ul><li>In respect of all other enterprises, mandatory in respect of accounting periods commencing April 1, 2003 </li></ul></ul><ul><ul><li>Can an enterprise apply the Standard from an earlier date? </li></ul></ul>
  13. 13. Treatment of Taxes on Income <ul><li>Tax expense (saving) should be included in determining net income </li></ul><ul><li>Tax expense (saving) should comprise </li></ul><ul><ul><li>Current tax (I.e., provision for tax payable as computed traditionally), and </li></ul></ul><ul><ul><li>Tax effects of all timing differences, subject to consideration of prudence in recognition of deferred tax assets </li></ul></ul>
  14. 14. Recognition of Timing Differences <ul><li>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. </li></ul><ul><li>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 </li></ul>
  15. 15. Recognition of Timing Differences <ul><li>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 </li></ul>
  16. 16. Recognition of Timing Differences <ul><li>Tax effect of accumulated timing differences to be recalculated every year using tax rates and tax laws that have been enacted or substantially enacted </li></ul><ul><li>In case of slab rates, average rate to be used. </li></ul><ul><li>Discounting of deferred tax assets/liabilities not permitted </li></ul>
  17. 17. Review of Deferred Tax Assets <ul><li>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 </li></ul>
  18. 18. Disclosure <ul><li>Assets and liabilities representing current tax should be offset if: </li></ul><ul><ul><li>legal right of set off exists; </li></ul></ul><ul><ul><li>assets and liabilities are intended to be settled on a net basis </li></ul></ul>
  19. 19. Disclosure <ul><li>Assets and liabilities representing deferred tax should be offset if: </li></ul><ul><ul><li>legal right of set off exists; </li></ul></ul><ul><ul><li>assets and liabilities relate to taxes levied by same governing taxation laws </li></ul></ul><ul><li>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 </li></ul>
  20. 20. Disclosure <ul><li>Disclose major components of deferred tax assets and liabilities </li></ul><ul><li>Disclose nature of evidence supporting recognition of deferred tax assets in the event of there being unabsorbed depreciation or carried forward tax losses </li></ul>
  21. 21. Transitional Provisions <ul><li>On first implementation of the standard, the net deferred tax balance accumulated prior to adoption of the standard should be adjusted against revenue reserves </li></ul>