Indian Accounting Standard (Ind AS) 12, Income Taxes, Important Material
Ind AS 12: Income Taxes
Income taxes are an expense incurred in operating most businesses and to be reflected in operating results.
The income taxes are paid on the income as computed by tax laws of the country.
Accounting income calculated in profit and loss account is not always be the same as taxable income as per income tax law.
There might be a difference between the amount of ‘net income’ in the financial statements and ‘taxable income’ in the tax return.
In accounting the accrual basis is followed for calculating the income (Loss) whereas in case of tax law it does not follow the accrual system of accounting. It results in a tax difference.
The items which cause difference usually get reserved/ adjusted over a period of time, until they reversed/adjusted an asset and liability must be recorded on the Balance Sheet. The account used to do this balancing is called ‘Deferred Tax Asset/ Liability’.
The objective of this Standard is to prescribe the accounting treatment for income taxes.
The principal issue in accounting for income taxes is how to account for the current and future tax consequences of:
(a) the future recovery (settlement) of the carrying amount of assets (liabilities) that are recognised in an entity’s balance sheet; and
(b) transactions and other events of the current period that are recognised in an entity’s financial statements.
(a) This Standard shall be applied in accounting for income taxes.
(b) For the purposes of this Standard, income taxes include all domestic and foreign taxes which are based on taxable profits, withholding taxes, which are payable by a subsidiary, associate or joint arrangement on distributions to the reporting entity.
(c) This Standard does not deal with the methods of accounting for government grants or investment tax credits.
(d) However, this Standard deals with the accounting for temporary differences that may arise from such grants or investment tax credits.