Standard 22: Accounting for Taxes on Income

Standard 22: Accounting for Taxes on Income · Complied AI

(loss)

for a period, determined in accordance with the tax laws, based upon which income tax payable

(recoverable) is determined.

4.3 Tax expense (tax saving) is the aggregate of current

tax and deferred tax charged or credited to the statement of profit and loss for the period.

4.4 Current tax is the amount of income tax determined to

be payable (recoverable) in respect of the taxable income (tax loss) for a period.

4.5 Deferred tax is the tax effect of timing

differences.

4.6 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.

4.7 Permanent differences are the differences between

taxable income and accounting income for a period that originate in one period and do not reverse

subsequently.

5 Taxable income is calculated in accordance with tax laws. In some circumstances, the requirements of these laws to

compute taxable income differ from the accounting policies applied to determine accounting income. The effect of

this difference is that the taxable income and accounting income may not be the same.

6 The differences between taxable income and accounting income can be classified into permanent differences and timing

differences . Permanent differences are those differences between taxable income and accounting income which

originate in one period and do not reverse subsequently. For instance, if for the purpose of computing taxable

income, the tax laws allow only a part of an item of expenditure, the disallowed amount would result in a permanent

difference.

7 Timing differences are those 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. Timing differences arise because the

period in which some items of revenue and expenses are included in taxable income do not coincide with the period in

which such items of revenue and expenses are included or considered in arriving at accounting income. For example,

machinery purchased for scientific research related to business is fully allowed as deduction in the first year for

tax purposes whereas the same would be charged to the statement of profit and loss as depreciation over its useful

life. The total depreciation charged on the machinery for accounting purposes and the amount allowed as deduction

for tax purposes will ultimately be the same, but periods over which the depreciation is charged and the deduction

is allowed will differ. Another example of timing difference is a situation where, for the purpose of computing

taxable income, tax laws allow depreciation on the basis of the written down value method, whereas for accounting

purposes, straight line method is used. Some other examples of timing differences arising under the Indian tax laws

are given in Illustration 1 .

8 Unabsorbed depreciation and carry forward of losses which can be set- off against future taxable income are also

considered as timing differences and result in deferred tax assets, subject to consideration of prudence (see paragraphs 15 - 18 ).

Recognition

9 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.

10 Taxes on income are considered to be an expense incurred by the enterprise in earning income and are accrued in

the same period as the revenue and expenses to which they relate. Such matching may result into timing differences.

The tax effects of timing differences are included in the tax expense in the statement of profit and loss and as

deferred tax assets (subject to the consideration of prudence as set out in paragraphs 15-18) or as deferred tax

liabilities, in the balance sheet.

11 An example of tax effect of a timing difference that results in a deferred tax asset is an expense provided in the

statement of profit and loss but not allowed as a deduction under Section 43B of the Income-tax Act, 1961. This

timing difference will reverse when the deduction of that expense is allowed under Section 43B in subsequent

year(s). An example of tax effect of a timing difference resulting in a deferred tax liability is the higher charge

of depreciation allowable under the Income-tax Act, 1961, compared to the depreciation provided in the statement of

profit and loss. In subsequent years, the differential will reverse when comparatively lower depreciation will be

allowed for tax purposes.

12 Permanent differences do not result in deferred tax assets or deferred tax liabilities.

13 Deferred tax should be recognised for all the timing differences, subject to the consideration of

prudence in respect of deferred tax assets as set out in paragraphs 15-18.

Explanation

Explanation:

(c)

For the above purposes, the timing differences which originate first are considered to reverse first.

The application of the above explanation is illustrated in the Illustration attached to the Standard.

14 This Standard requires recognition of deferred tax for all the timing differences.

This is based on the principle that the financial statements for a period should recognise the tax effect, whether

current or deferred, of all the transactions occurring in that period.

15 Except in the situations stated in paragraph 17, deferred tax assets

should be recognised 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.

16 While recognising the tax effect of timing differences, consideration of prudence

cannot be ignored. Therefore, deferred tax assets are recognised and carried forward only to the extent that there

is a reasonable certainty of their realisation. This reasonable level of certainty would normally be achieved by

examining the past record of the enterprise and by making realistic estimates of profits for the future.

17 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.

Explanation

Explanation:

1 Determination of virtual certainty that sufficient future taxable income will be available is a

matter of judgement based on convincing evidence and will have to be evaluated on a case to case basis. Virtual

certainty refers to the extent of certainty, which, for all practical purposes, can be considered certain. Virtual

certainty cannot be based merely on forecasts of performance such as business plans. Virtual certainty is not a

matter of perception and is to be supported by convincing evidence. Evidence is a matter of fact. To be convincing,

the evidence should be available at the reporting date in a concrete form, for example, a profitable binding export

order, cancellation of which will result in payment of heavy damages by the defaulting party. On the other hand, a

projection of the future profits made by an enterprise based on the future capital expenditures or future

restructuring etc., submitted even to an outside agency, e.g., to a credit agency for obtaining loans and accepted

by that agency cannot, in isolation, be considered as convincing evidence.

2 (a) As per the relevant provisions of the Income-tax Act, 1961 , the ‘loss’ arising under

the head ‘Capital gains’ can be carried forward and set-off in future years, only against the income

arising under that head as per the requirements of the Income-tax Act, 1961.

(c)

In case an enterprise expects that the timing differences arising in the current period would

reverse in a period in which it may pay tax under section 115JB of the Income-tax Act, 1961, the deferred tax assets

and liabilities in respect of timing differences arising during the current period, tax effect of which is required

to be recognised under AS 22, is measured using the regular tax rates and not the tax rate under section 115JB of

the Income-tax Act, 1961.

22 Deferred tax assets and liabilities are usually measured using the tax rates and

tax laws that have been enacted. However, certain announcements of tax rates and tax laws by the government may have

the substantive effect of actual enactment. In these circumstances, deferred tax assets and liabilities are measured

using such announced tax rate and tax laws.

23 When different tax rates apply to different levels of taxable income, deferred tax

assets and liabilities are measured using average rates.

24. Deferred tax assets and liabilities should not be discounted to

their present value.

25. The reliable determination of deferred tax assets and liabilities on a discounted

basis requires detailed scheduling of the timing of the reversal of each timing difference. In a number of cases

such scheduling is impracticable or highly complex. Therefore, it is inappropriate to require discounting of

deferred tax assets and liabilities. To permit, but not to require, discounting would result in deferred tax assets

and liabilities which would not be comparable between enterprises. Therefore, this Standard does not require or

permit the discounting of deferred tax assets and liabilities.

Review of Deferred Tax Assets

26 The carrying amount of deferred tax assets should be reviewed at each

balance sheet date. An enterprise should write-down the carrying amount of a deferred tax asset to the extent that

it is no longer reasonably certain or virtually certain, as the case may be (see paragraphs 15 to 18), that

sufficient future taxable income will be available against which deferred tax asset can be realised. Any such

write-down may be reversed to the extent that it becomes reasonably certain or virtually certain, as the case may be

(see paragraphs 15 to 18), that sufficient future taxable income will be available.

Presentation and Disclosure

27 An enterprise should offset assets and liabilities representing

current tax if the enterprise:

(b)

the deferred tax assets and the deferred tax liabilities relate to taxes on income levied by the same

governing taxation laws.

30 Deferred tax assets and liabilities should be distinguished from

assets and liabilities representing current tax for the period. Deferred tax assets and liabilities should be

disclosed under a separate heading in the balance sheet of the enterprise, separately from current assets and

current liabilities.

Explanation

Explanation:

For non-companies entities, Deferred tax assets (net of the deferred tax liabilities, if any, in

accordance with paragraph 29) may be disclosed on the face of the balance sheet separately after the head

‘Investments’ and deferred tax liabilities (net of the deferred tax assets, if any, in accordance with

paragraph 29) may be disclosed on the face of the balance sheet separately after the head ‘Unsecured

Loans.’

31 The break-up of deferred tax assets and deferred tax liabilities into

major components of the respective balances should be disclosed in the notes to accounts.

32 The nature of the evidence supporting the recognition of deferred tax

assets should be disclosed, if an enterprise has unabsorbed depreciation or carry forward of losses under tax laws.

Paragraph 32A-32D for Entities other than Companies

International tax reform—Pillar Two model rules

32A An enterprise should disclose that it has applied the exception to recognising and disclosing

information about deferred tax assets and liabilities related to Pillar Two income taxes (see paragraph 2A ).

32B An enterprise should disclose separately its current tax expense (income) related to Pillar Two

income taxes.

32C In periods in which Pillar Two legislation is enacted or substantively enacted but not yet in

effect, an enterprise should disclose known or reasonably estimable information that helps users of financial

statements understand the enterprise’s exposure to Pillar Two income taxes arising from that legislation.

32D To meet the disclosure objective in paragraph 32C, an enterprise should disclose qualitative and

quantitative information about its exposure to Pillar Two income taxes at the end of the reporting period. This

information does not have to reflect all the specific requirements of the Pillar Two legislation and can be provided

in the form of an indicative range. To the extent information is not known or reasonably estimable, an enterprise

should instead disclose a statement to that effect and disclose information about the enterprise’s progress in

assessing its exposure.

Examples illustrating paragraphs 32C–32D

Examples of information an enterprise could disclose to meet the objective and

requirements in paragraphs 32C–32D include:

(b)

quantitative information such as:

(i)

an indication of the proportion of an enterprise’s profits that might be

subject to Pillar Two income taxes and the average effective tax rate applicable to

those profits: or

(ii)

an indication of how an enterprise’s average effective tax rate would have

changed if Pillar Two legislation had been in effect.

Proviso

Provided that a Micro, Small and Medium-sized non-company entity may not apply the disclosure

requirements laid down in paragraphs 32C and 32D.

Transitional Provisions 2

33 On the first occasion that the taxes on income are accounted for in

accordance with this Standard, the enterprise should recognise, in the financial statements, the deferred tax

balance that has accumulated prior to the adoption of this Standard as deferred tax asset/liability with a

corresponding credit/charge to the revenue reserves, subject to the consideration of prudence in case of deferred

tax assets (see paragraphs 15-18). The amount so credited/charged to the revenue reserves should be the same as that

which would have resulted if this Standard had been in effect from the beginning.

33A On the first occasion when a non-company MSME avails the

exemption 3 , the accumulated deferred tax asset/liability appearing in the financial statements of

immediate previous accounting period, should be adjusted against the opening revenue reserves/owner’s funds.

34. For the purpose of determining accumulated deferred tax in the period in which

this Standard is applied for the first time, the opening balances of assets and liabilities for accounting purposes

and for tax purposes are compared and the differences, if any, are determined. The tax effects of these differences,

if any, should be recognised as deferred tax assets or liabilities, if these differences are timing differences. For

example, in the year in which an enterprise adopts this Standard, the opening balance of a fixed asset is Rs. 100

for accounting purposes and Rs. 60 for tax purposes. The difference is because the enterprise applies written down

value method of depreciation for calculating taxable income whereas for accounting purposes straight line method is

used. This difference will reverse in future when depreciation for tax purposes will be lower as compared to the

depreciation for accounting purposes. In the above case, assuming that enacted tax rate for the year is 40% and that

there are no other timing differences, deferred tax liability of Rs. 16 [(Rs. 100 - Rs. 60) x 40%] would be

recognised. Another example is an expenditure that has already been written off for accounting purposes in the year

of its incurrence but is allowable for tax purposes over a period of time. In this case, the asset representing that

expenditure would have a balance only for tax purposes but not for accounting purposes. The difference between

balance of the asset for tax purposes and the balance (which is nil) for accounting purposes would be a timing

difference which will reverse in future when this expenditure would be allowed for tax purposes. Therefore, a

deferred tax asset would be recognised in respect of this difference subject to the consideration of prudence (see

paragraphs 15 - 18).

Paragraph 35 for Entities other than Companies

Effective date

35. International Tax Reform—Pillar Two Model Rules, added paragraphs 2A and 32A–32D. An enterprise

should:

(d)

Differences in composition of actual cost of assets.

4 Where a deduction is allowed in one year for tax purposes on the basis of a deposit made under a permitted deposit

scheme (e.g. tea development account scheme under section 33AB or site restoration fund scheme under section 33ABA)

and expenditure out of withdrawal from such deposit is debited in the statement of profit and loss in subsequent

years.

5 Income credited to the statement of profit and loss but taxed only in subsequent years e.g. conversion of capital

assets into stock in trade.

6 If for any reason the recognition of income is spread over a number of years in the accounts but the income is

fully taxed in the year of receipt.

Illustration II

Note: This illustration does not form part of the Accounting Standard. Its purpose is to

illustrate the application of the Accounting Standard. Extracts from statement of profit and loss are provided

to show the effects of the transactions described below.

Illustration 1

A company, ABC Ltd., prepares its accounts annually on 31st March. On 1st April, 20x1, it purchases a machine at a

cost of Rs. 1,50,000. The machine has a useful life of three years and an expected scrap value of zero. Although it

is eligible for a 100% first year depreciation allowance for tax purposes, the straight-line method is considered

appropriate for accounting purposes. ABC Ltd. has profits before depreciation and taxes of Rs. 2,00,000 each year

and the corporate tax rate is 40 per cent each year.

The purchase of machine at a cost of Rs. 1,50,000 in 20x1 gives rise to a tax saving of Rs. 60,000. If the cost of

the machine is spread over three years of its life for accounting purposes, the amount of the tax saving should also

be spread over the same period as shown below:

Statement of Profit and Loss

(for the three years ending 31st March, 20x1, 20x2, 20x3)

(Rupees in thousands)

20x1

20x2

20x3

Profit before depreciation and taxes

200

Less: Depreciation for accounting purposes

Profit before taxes

150

Less: Tax expense

Current tax

0.40 (200 – 150)

0.40 (200)

Deferred tax

Tax effect of timing differences originating during the year 0.40 (150 – 50)

Tax effect of timing differences reversing during the year 0.40 (0-50)

(20)

Tax expense

After tax

Net timing differences

100

Deferred tax liability

In 20x1, the amount of depreciation allowed for tax purposes exceeds the amount of depreciation charged for

accounting purposes by Rs. 1,00,000 and, therefore, taxable income is lower than the accounting income. This gives

rise to a deferred tax liability of Rs. 40,000. In 20x2 and 20x3, accounting income is lower than taxable income

because the amount of depreciation charged for accounting purposes exceeds the amount of depreciation allowed for

tax purposes by Rs. 50,000 each year. Accordingly, deferred tax liability is reduced by Rs. 20,000 each in both the

years. As may be seen, tax expense is based on the accounting income of each period.

In 20x1, the profit and loss account is debited and deferred tax liability account is credited with the amount of tax

on the originating timing difference of Rs. 1,00,000 while in each of the following two years, deferred tax

liability account is debited and profit and loss account is credited with the amount of tax on the reversing timing

difference of Rs. 50,000.

The following Journal entries will be passed:

Year 20x1

Profit and Loss A/c

Dr. 20,000

To Current tax A/c

20,000

(Being the amount of taxes payable for the year 20x1 provided for)

Profit and Loss A/c

Dr. 40,000

To Current tax A/c

40,000

(Being the deferred tax liability created for originating timing difference of Rs.

1,00,000)

Year 20x2

Profit and Loss A/c

Dr. 80,000

To Current tax A/c

80,000

(Being the amount of taxes payable for the year 20x2 provided for)

Profit and Loss A/c

Dr. 20,000

To Current tax A/c

20,000

(Being the deferred tax liability adjusted for reversing timing difference of Rs. 50,000

Year 20x3

Profit and Loss A/c

Dr. 80,000

To Current tax A/c

80,000

(Being the amount of taxes payable for the year 20x3 provided for)

Profit and Loss A/c

Dr. 20,000

To Current tax A/c

20,000

(Being the deferred tax liability adjusted for reversing timing difference of Rs. 50,000)

In year 20x1, the balance of deferred tax account i.e., Rs. 40,000 would be shown separately from the current tax

payable for the year in terms of paragraph 30 of the Standard. In Year 20x2, the balance of deferred tax account

would be Rs. 20,000 and be shown separately from the current tax payable for the year as in year 20x1. In Year 20x3,

the balance of deferred tax liability account would be nil.

Illustration 2

In the above illustration, the corporate tax rate has been assumed to be same in each of the three years. If the rate

of tax changes, it would be necessary for the enterprise to adjust the amount of deferred tax liability carried

forward by applying the tax rate that has been enacted or substantively enacted by the balance sheet date on

accumulated timing differences at the end of the accounting year (see paragraphs 21 and 22). For example, if in

Illustration 1, the substantively enacted tax rates for 20x1, 20x2 and 20x3 are 40%, 35% and 38% respectively, the

amount of deferred tax liability would be computed as follows:

The deferred tax liability carried forward each year would appear in the balance sheet as under:

31st March, 20x1 = 0.40 (1,00,000)= Rs. 40,000

31st March, 20x2 = 0.35 (50,000) = Rs. 17,500

31st March, 20x3 = 0.38 (Zero) = Rs. Zero

Accordingly, the amount debited/(credited) to the profit and loss account (with corresponding credit or debit to

deferred tax liability) for each year would be as under:

31st March, 20x1

Debit

Rs. 40,000

31st March, 20x2

(Credit)

Rs. (22,500)

31st March, 20x3

(Credit)

Rs. (17,500)

Illustration 3

A company, ABC Ltd., prepares its accounts annually on 31 s t

March. The company has incurred a loss of Rs. 1,00,000 in the year 20x1 and made profits of Rs. 50,000 and

60,000 in year 20x2 and year 20x3 respectively. It is assumed that under the tax laws, loss can be carried forward

for 8 years and tax rate is 40% and at the end of year 20x1, it was virtually certain, supported by convincing

evidence, that the company would have sufficient taxable income in the future years against which unabsorbed

depreciation and carry forward of losses can be set-off. It is also assumed that there is no difference between

taxable income and accounting income except that set- off of loss is allowed in years 20x2 and 20x3 for tax

purposes.

Statement of Profit and Loss

(for the three years ending 31st March, 20x1, 20x2, 20x3)

(Rupees in thousands)

20x1

20x2

20x3

Profit (loss)

(36)

Illustration 4

Note: The purpose of this illustration is to assist in clarifying the meaning of the explanation to

paragraph 13 of the Standard.

Facts:

1 The income before depreciation and tax of an enterprise for 15 years is Rs. 1000 lakhs per year, both as per

the books of account and for income-tax purposes.

2 The enterprise is subject to 100 percent tax-holiday for the first 10 years under section 80-IA. Tax rate is

assumed to be 30 percent.

3 At the beginning of year 1, the enterprise has purchased one machine for Rs. 1500 lakhs. Residual value is

assumed to be nil.

4 For accounting purposes, the enterprise follows an accounting policy to provide depreciation on the machine

over 15 years on straight-line basis.

5 For tax purposes, the depreciation rate relevant to the machine is 25% on written down value basis.

The following computations will be made, ignoring the provisions of section 115JB (MAT), in this regard:

Table 1

Computation of depreciation on the machine for accounting purposes and

tax purposes

(Amounts in Rs. lakhs)

Year

Depreciation for

accounting purposes

Depreciation for tax

purposes

100

375

100

281

100

211

100

158

100

119

100

At the end of the 15th year, the carrying amount of the machinery for accounting purposes would be nil whereas for

tax purposes, the carrying amount is Rs. 19 lakhs which is eligible to be allowed in subsequent years.

Table 2

Computation of Timing differences

(Amounts in Rs.lakhs)

Year

income before Depreciation and tax(both for accounting purpose and tax purpose)

Accounting Income after depreciation

Gross Total income(after deducting under tax laws

Deduction under section

80-IA

Taxable Income

(4-5)

Total Difference between accounting income and taxable income

(3-6)

Permanent Difference(deduction pursuant to section 80-1A)

Timing Difference(due to different amount of depreciation for accounting purpose and tax purposes)

(O=Originating and R=Reversing

1000

900

625

Nil

900

625

275(O)

1000

900

719

Nil

900

719

181(O)

1000

900

789

Nil

900

789

111(O)

1000

900

842

Nil

900

842

58(O)

1000

900

881

Nil

900

881

19(O)

1000

900

911

Nil

900

911

11(R)

1000

900

933

Nil

900

933

33(R)

1000

900

950

Nil

900

950

50(R)

1000

900

962

Nil

900

962

62(R)

1000

900

972

Nil

900

972

72(R)

1000

900

979

Nil

979

-79

Nil

79(R)

1000

900

984

Nil

984

-84

Nil

84(R)

1000

900

988

Nil

988

-88

Nil

88(R)

1000

900

991

Nil

991

-91

Nil

91(R)

1000

900

993

Nil

993

-93

Nil

74(R)

19(O)

Notes:

1 Timing differences originating during the tax holiday period are Rs.644 lakhs, out of which Rs. 228 lakhs are

reversing during the tax holiday period and Rs. 416 lakhs are reversing after the tax holiday period. Timing

difference of Rs. 19 lakhs is originating in the 15th year which would reverse in subsequent years when for

accounting purposes depreciation would be nil but for tax purposes the written down value of the machinery of Rs. 19

lakhs would be eligible to be allowed as depreciation.

2 As per the Standard, deferred tax on timing differences which reverse during the tax holiday period should not be

recognised. For this purpose, timing differences which originate first are considered to reverse first. Therefore,

the reversal of timing difference of Rs. 228 lakhs during the tax holiday period, would be considered to be out of

the timing difference which originated in year 1. The rest of the timing difference originating in year 1 and timing

differences originating in years 2 to 5 would be considered to be reversing after the tax holiday period. Therefore,

in year 1, deferred tax would be recognised on the timing difference of Rs. 47 lakhs (Rs. 275 lakhs - Rs. 228 lakhs)

which would reverse after the tax holiday period. Similar computations would be made for the subsequent years. The

deferred tax assets/liabilities to be recognised during different years would be computed as per the following

Table.

Table 3

Computation of current tax and deferred tax

(Amounts in Rs. lakhs)

Year

Current tax (Taxable Income x 30%)

Deferred tax (Timing difference x 30%)

Accumulated Deferred tax (L= Liability and A = Asset)

Tax expense

Nil

47 × 30%= 14

(see note 2 above)

14 (L)

Nil

181 × 30%=54

68 (L)

Nil

111× 30%=33

101 (L)

Nil

58 × 30%= 17

118 (L)

Nil

19 × 30%=6

124 (L)

Nil

Nil 1

124 (L)

Nil

Nil 1

124 (L

Nil

Nil 1

124 (L)

Nil

Nil 1

124 (L)

Nil

Nil 1

124 (L)

Nil

294

-79 × 30%= -24

100 (L)

270

295

-84 × 30%= -25

75 (L)

270

296

-88 × 30%= -26

49 (L)

270

297

-91 × 30%= -27

22 (L)

270

298

-74 × 30%= -22

Nil

270

-19 × 30%= -6

6(A) 2

1. No deferred tax is recognised since in respect of timing differences

reversing during the tax holiday period, no deferred tax was recognised at their origination.

2. Deferred tax asset of Rs. 6 lakhs would be recognised at the end of year 15

subject to consideration of prudence as per AS 22. If it is so recognised, the said deferred tax asset would be

realized in subsequent periods when for tax purposes depreciation would be allowed but for accounting purposes no

depreciation would be recognised.

Footnotes

* The Standard was earlier notified as part of Companies

(Accounting Standards) Rules, 2006, under Companies Act, 1956. The Standard has been notified as part of Companies

(Accounting Standards) Rules, 2021, under Companies Act, 2013.

1 Attention is specifically drawn to paragraph 4.3 of

the Preface , according to which Accounting Standards are intended to apply only to items which are material.

2 Ministry of Corporate Affairs, Government of India, inserted the following footnote in