This document provides an overview of Accounting Standard 22 on accounting for taxes on income. It discusses key aspects of the standard such as its applicability, definitions of deferred tax asset and liability, recognition and measurement of deferred taxes, and required disclosures. The standard aims to prescribe the accounting treatment for taxes on income in line with the matching concept and ensures transparency by accounting for the tax effect of timing differences between accounting income and taxable income.

1. JOSHI AND KARANDIKAR
CHARTERED ACCOUNTANTS
AS 22 - ACCOUNTING FOR TAXES ON INCOME
BY
-MALAVIKA MULAY
- URMILA BAPAT

2. Accounting Standard - 22
• AS has become mandatory for entities falling
under all levels (categorised by ICAI)
• Supersedes the earlier Guidance Note issued
by ICAI in 1991
• Became mandatory in phased manner

3. Applicability of AS 22
(For All Levels - I / II/ III)
Companies listed and in the process of listing in
India - including Group companies.
01.04.2001
In respect of other companies not covered above. 01.04.2002
In respect of all other enterprises. 01.04.2006
Issued by council of Institute of Chartered Accountants of
India
Comes into force on or after 01-04-2001

4. Need for AS – 22….
• Practical issues in proper accounting taxes
• AS 22 - NOT a theoretical standard but a practical one.
• We need to understand the exact application of the
standard initially
• ONLY experts who have practiced for years can command
the application of the same

5. Two types of income
• ACCOUTING INCOME • TAXABLE INCOME
• Based upon
– Companies Act,1956
– Accounting Concepts
– Accounting Principles
– Accounting Standards
• Based upon
THE ONLY AND ONLY
– INCOME TAX ACT 1961
OR AS PER ANY OTHER TAX
LAW
AS WELL AS
(FOREIGN LAWS)
• Profit before tax determined as per
accounting framework
• Taxable profit tax determined as per
tax law

6. As the name suggests
To prescribe accounting treatment for taxes
Taxes on Income one of the significant matter
MATCHING CONCEPT
The standard is based on the ‘Matching concept’ of
accounting.
Taxes are accrued in the same period related to
revenue/expenses
But in many cases, taxable income ≠ accounting income
OBJECTIVE

7. REASONS
1.Difference between items of Revenue and
Expenses as per Profit And loss Account and
those considered for tax purposes.
2.Difference between amount of expenditure
considered differently in two cases.
3.Timing Differences
This creates some issues, dealt in AS 22

8. NOTE - SCOPE
• APPLICABLE FOR DOMESTIC TAXES AS WELL AS
FOREIGN TAXES
• It includes
• determination of the expense/saving related to taxes on
income
• disclosure of the same in the financial statements.

9. Exclusions
Statement does not specify when, or how, an enterprise
should account for taxes that are payable on
• distribution of dividends and
• other distributions made by the enterprise.

10. SIMPLE DEFINITIONS
• Tax expense = aggregate of current tax
and deferred tax.
• Current tax = tax payable in respect of the
taxable income of the current period.
• Deferred tax = tax effect of timing
differences.

11. What are timing differences?
Timing differences are the differences
between taxable income and
accounting income for a period that
originate in one period and are capable
of reversal in one or more subsequent
periods.
Best Example – Depreciation, Section 43B

12. Deferred Tax Liability
• Accounting Income > Taxable Income
• Temporary differences will result taxable amount in future
years
• Example:

13. Deferred Tax Asset
• Accounting Income < Taxable Income
• Temporary differences will result deductible
amount in future years
• Example:

14. 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 I year)
• Up to Rs. 5000 assets write off under Companies Act
• 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)]

15. • 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)
• Expenses amortized in books of account over a period of years but a shorter or longer
period is allowable for tax purposes
• Miscellaneous Expenditure
• VRS

16. Expenses debited in Statement of Profit and Loss Account but that
shall never be allowed as expense under IT Act
E g. Penalties paid
Permanent differences are the differences between taxable
income and accounting income for a period that originate in one
period and do not reverse subsequently.
Permanent Difference
Permanent differences do not result in deferred tax assets or
deferred tax liabilities.

17. FOR EXAMPLE
• 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

18. RECOGNITION
Tax expense for the period, comprising current tax and deferred tax, should be
included in the determination of the net profit or loss for the period.
CONCEPTS
-TRUE AND FAIR VIEW - B/S
-MATCHING CONCEPT
-PRUDENCE
OBVIOUSLY
Deferred tax should be recognized for all the timing differences, subject
to the consideration of prudence in respect of deferred tax assets.

19. RECOGNITION OF DEFERRED TAX
ASSET
Should be recognized and carried forward only to the extent that there is a
reasonable certainty that sufficient future taxable income will be available
against which such deferred tax assets can be realised.
Where an enterprise has unabsorbed depreciation or carry forward of losses
under tax laws, deferred tax assets should be recognised only to the extent that
there is virtual certainty supported by convincing evidence that sufficient future
taxable income will be available against which such deferred tax assets can be
realised.

20. Deffered Tax Asset
Re-assessment
RIGHT
Re-view
DUTY
Relates to DTA
Previously unrecognized
Relates to DTA
Previously recognized
Re-assessment of unrealized deferred tax asset
AT EACH B/S DATE

21. DEFERRED TAX
A I > TI DEFERRED TAX LIABILITY
AI < TI DEFERRED TAX ASSET
INCOME AS
PER TI, LOSS
AS PER AI
DEFERRED TAX ASSET
AI PROFIT BUT
LOSS AS PER
MI (MAT is
payable)
DEFERRED TAX LIABILITY (for
the difference)

22. ASI 9 – Virtual Certainty Supported by Convincing
Evidence
• Sufficient taxable income will be available is a matter of
judgement – case to case basis
• Extent of certainty for all practical purposes, not mere
forecasts
• Not a matter of perception but fact
• Evidence – reporting date

23. MEASUREMENT
Current Tax Applicable tax rates and
laws
Deferred Tax Tax rates and laws as at
B/S date (tax rate
enacted or substantively
enacted at BS date)
Different Tax rates DTA average rate
DISCOUNTING OF DTA/DTL AT PRESENT
VALUE IS PROHIBITED

24. Presentation of DT
Balance Sheet
• Shareholder’s Funds
• Share applictn money
pending allotment
• Non current liabilities
• (b) Deferred tax liability
(net)
• Current liabilities
Total
• Non Current Assets
• (c) Deffered Tax asset
(net)
• Current Assets
Total
PROFIT AND LOSS ACCOUNT
I. INCOME
Gross Sales
Less: Excise Duty
Net Sales
Other Income
TOTAL - I
II. EXPENDITURE
Material Cost
Employees' Remuneration & Benefits
Manufacturing Expenses
Selling, General & Administration Expenses
Interest
Depreciation
TOTAL - II
III. PROFIT BEFORE TAX (I-II)
X. Provision for Tax Expense
(1) Current Tax
(2) Deferred Tax
XI. Profit after Tax (III - IV)
PRESENTATION

25. DISCLOSURES
• Break-up of major components of DTA / DTL to be
disclosed.
• DTA and DTL to be set off if permissible under tax laws
but to be shown separately otherwise.
• Evidence supporting the recognition of DTA to be
disclosed, if an enterprise has Unabsorbed Depreciation /
Tax Losses to be carried forward.

26. TRANSITIONAL PROVISION
On the first occasion, the enterprise should recognize, the deferred tax
balance that has accumulated prior to adoption of this statement as
DTA/DTL with the corresponding credit/charge to the revenue
reserves.
Non Corporate Entities : Capital Account
In the first year of AS

27. THERE ARE TWO APPROACHES
PROFIT AND LOSS APPROACH
EG.DEPRECIATION
BALANCE SHEET APPROACH
EG. WDV
Better approach could be B/S as there is less
chance that we miss out any item

28. Financial Implication 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 BIFR purposes
(4) Affects Debt -Equity Ratio and TOL / TNW
(Double edged sword)

29. (6) Affects Net Profit Ratio (PAT/Net Sales)
(7) Affects EPS
(8) Affects Dividend declaration - No specific
reference 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)
(10) Accounting for Taxes on Income in Interim
Financial Reports as per AS-2

30. Accounting Standard Interpretations (ASI)
relating to the AS:
1. ASI 3: Accounting for Taxes on Income in the
situations of Tax Holiday U/S 80-IA and 80-IB of the
Income-tax Act, 1961
2. ASI 5: Accounting for Taxes on Income in the
situation of Tax Holiday U/S 10A and 10B of the
Income-tax Act,1961
3. ASI 4: Losses under the head Capital Gains
4. ASI 6: Accounting for Taxes on Income in the context
of S. 115JB of the Income-tax Act, 1961

31. Accounting Standard Interpretations (ASI)
relating to the AS:
5. ASI 7: Disclosure of deferred tax assets and
deferred tax liabilities in the balance sheet of a
company
6. ASI 9: Virtual Certainty Supported by convincing
evidence
7. ASI 11: Accounting for Taxes on Income in case of an
Amalgamation

32. AS 22 – Conclusion
- Increases transparency
- Matching / accrual concept upheld
- Tax effect Accounting - ensures that Tax Charge in
future accounting periods is not vitiated by Timing
Differences
- Aligns our AS with global AS

33. THE BEGINNING