Download Quick Reference on Accounting Standard (AS) 22 Accounting for Taxes on Income
The objective of this Standard is to prescribe accounting treatment of taxes on income.
Taxable income may be significantly different from the accounting income posing problems in matching of taxes against revenue for a period.
1) Difference between items of revenue and expenses as appearing in the Statement of Profit and Loss and the items which are considered as revenue, expenses or deductions for tax purposes.
2) Difference between the amount in respect of a particular item of revenue or expense as recognised in the Statement of Profit and Loss and the corresponding amount which is recognised for the computation of taxable income.
Differences between accounting income and taxable income
- Permanent Differences: Differences that originate in one period and do not reverse subsequently.
- Timing Differences: Differences that originate in one period and are capable of reversal in one or more subsequent periods.
Accounting income (loss) is the net profit or loss for a period, as reported in the Statement of Profit and Loss, before deducting income tax expense or adding income tax saving.
Taxable income (tax loss) is the amount of the income (loss) for a period, determined in accordance with the tax laws, based upon which income tax payable (recoverable) is determined.
Current tax is the amount of income tax determined to be payable (recoverable) in respect of the taxable income (tax loss) for a period.
Deferred tax is the tax effect of timing differences.
- 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.
- Deferred tax should be recognised for all the timing differences, subject to the consideration of prudence in respect of deferred tax assets (DTA).
- When there is unabsorbed depreciation or carry-forward of losses under tax laws- DTA should be recognised only to the extent 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. In other circumstances, DTA should be recognised only to the extent there is reasonable certainty that sufficient future taxable income will be available against which such deferred tax assets can be realised.
- Current tax should be measured at the amount expected to be paid to (recovered from) the taxation authorities, using the applicable tax rates and tax laws.
- Deferred tax assets and liabilities should be measured using the tax rates and tax laws that have been enacted or substantively enacted by the balance sheet date.
- Deferred tax assets and liabilities should not be discounted to their present value.
Review of DTA
- At each balance sheet date
- Write-down, to the extent DTA is not realisable.
- Reverse the previous write-down of DTA, to the extent realisable.
- An enterprise should offset assets and liabilities representing current tax if the enterprise has a legally enforceable right to set off the recognised amounts and intends to settle the asset and the liability on a net basis.
- An enterprise should offset deferred tax assets and deferred tax liabilities if the enterprise has a legally enforceable right to set off assets against liabilities representing current tax; and the deferred tax assets and the deferred tax liabilities relate to taxes on income levied by the same governing taxation laws.
- 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.