Transcript AS 22 - CAalley

SUB REGIONAL CONFERENCE &
19th ANNUAL CONFERENCE of
HUBLI BRANCH
Deferred Taxation AS 22 and
Latest Developments
K.GURURAJ ACHARYA
CHARTERED ACCOUNTANT
TELEFAX: (080) 2336 1800
[email protected]
AS 22 Accounting for Taxes on Income
ICAI Statements
Standards
Guidance Notes
(Mandatory)
(Recommendatory)
Accounting
Standards
( 29 + 1 )
A S I (29)
{7 of AS 22}
Auditing & Assurance
Standards (SAP)
( 32 + 2 )
General
Clarification (18)
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AS 22 Accounting for Taxes on Income
Accounting Standards u/s.211(3c)
(wef 31.10.1998)
Accounting Standard means the standard of
accounting:
Recommended by ICAI and
Prescribed by Government in
Consultation with the NACAS constituted u/s
210A(1) of the Companies Act, 1956.
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AS 22 Accounting for Taxes on Income
Deviation from AS
4.(d) In our opinion, the Balance Sheet, P&L Account and the Cash
Flow Statement dealt with by this report comply with the AS
referred to in Sec. 211(3C) of the Companies Act, 1956
subject to the following observations:
Certain Transactions are accounted on cash basis vide
significant policy No. 2. Further contract works / certain
consultancy works undertaken by the company are not
accounted on accrual basis vide note 11 on the accounts. The
extent of impact on accounts is not ascertained.
Accounting Policy No. 13(b) is not in accordance with AS 10
on Fixed Assets. Certain transaction accounted under this policy
has the effect of overstating value of Fixed Assets, Depreciation
and profit by Rs. 2.05 Crores, Rs. 0.16 Crores and Rs. 1.89
Crores respectively
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AS 22 Accounting for Taxes on Income
Level - I
Level - II
Level - III
 Listed/Proposed to be listed Cos
 Banks, FIs, Insurance Cos
 Enterprises with > 50 crores Turnover in
preceding year
 > 10 crores borrowings at any time during the
year
 Holding & subsidiary Cos of above.
 Enterprises with > 40 Lacs but < 50 crores
Turnover.
 > 1 crore but < 10 crores borrowings
 Holding & subsidiary cos of above.
 Other than Level - I & Level - II cases
w.e.f 17-Sep-2003
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AS 22 Accounting for Taxes on Income
Applicability of AS 22
(For All Levels - I / II/ III)
Companies listed and in the 01.04.2001
process of listing in India including Group companies.
In respect of other companies not 01.04.2002
covered above.
In respect of all other enterprises. 01.04.2004
01.04.2006
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AS 22 Accounting for Taxes on Income
“Deferred Tax”
Deferred Taxes are ‘Income Tax’ which
arise in one period but because of Timing
Difference will have to be actually paid in
later years.
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AS 22 Accounting for Taxes on Income
Timing differences -TD- Differences between TI
and AI for a period that originate in one period and
are capable of reversal in one or more subsequent
periods.
Permanent differences -PD- are the differences
between TI and AI for a period that originate in one
period and do not reverse subsequently.
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AS 22 Accounting for Taxes on Income
“Deferred Tax ”
Taxable
Income
Accounting
Income
As per P&L A/c
Rs. 100 cr
Current Tax
(applicable rate/law)
Tax
Expense
As per IT Return
Rs. 70 cr
Timing
Difference
Rs. 20 cr
Permanent
Difference
Deferred Tax
(substantively enacted
rates /law) Average rate ?
No Tax effect
Rs. 10 cr
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AS 22 Accounting for Taxes on Income
“Deferred Tax ”
Accounting
Income
As per P&L A/c
Rs. 80 cr
Taxable
Income
As per IT Return
Current Tax
Rs. 90 cr
or
Timing
Difference
DTA Prudence
Rs. 20 cr
(DTL)
Reversal or DTA
Permanent
Difference
No Tax effect
Rs. 10 cr
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AS 22 Accounting for Taxes on Income
Computation of DT
STI
AI
+/- PD
+/- TD
TI
CT = IT on TI  (Applicable tax rates/laws)
DT = IT on (+\- TD)(Latest known tax rates/laws)
TE = CT – DT
(MAT - CT) is to be finally added to TE as a special case
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AS 22 Accounting for Taxes on Income
Case Study -1
As as 31st March
PBT - AI
Add: Depreciation - A/c's
Less: Depreciation - IT
Total Income - TI
TD-being Depn differential
CT -30% of IT
DT-30% of TD
Tax Exp.(CT-DT)
TE= IT on (AI+/-PD)
1
100
20
30
90
-10
Computer Pur. value
(Rs. In Crores)
50
2
3
4
100 100 100
12
7
4
12
5
2
100 102 102
0
2
2
27 30
-3 0
30 30
30 30
31
1
30
30
Depreciation Rate
Tax Rate
Co's Act IT Act
40%
60%
30%
5 6
7
8
9
10
100 100 100 100 100 100 1000
3 2
1
1
0
0 50
1 0
0
0
0
0 50
102 101 101 101 100 100 1000
2 1
1
1
0
0
0
31 31 30
1 1 0
30 30 30
30 30 30
K.G.Acharya & Co., Chartered Accountants
30
0
30
30
30
0
30
30
30
0
30
30
30 300
0
0
30 300
30 300
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AS 22 Accounting for Taxes on Income
As as 31st March
1
PBT - AI
100
Add: Depreciation - A/c's 20
43B disallowance
5
40A(3) disallowance 10
Less: Depreciation - IT
30
43B disallowance
0
Sec.10 exemption
20
Total Income - TI
85
TD
-5
(Rs. In Crores)
Co's Act
IT Act
50
40%
60%
2
3
4
5
6
7
100 100 100
100
100 100
12
7
4
3
2
1
0
7
0
0
0
9
11
12
13
14
15
16
12
5
2
1
0
0
5
0
0
7
0
0
20
20
20
20
20
20
86 101
95
89
96 106
-5
9
2
-5
1
10
8
100
1
0
17
0
0
20
98
1
30%
9
100
0
0
18
0
9
20
89
-9
10
100 1000
0
50
0
21
19
0
50
0
21
20
99 1000
0
0
CT -IT on TI
DT-30% of TD
Tax Exp.(CT-DT)
26
-2
27
26
-2
27
30
3
28
29
1
28
27
-2
28
29
0
29
32
3
29
29
0
29
27
-3
29
30
0
30
283
0
284
TE= IT on (AI+/-PD)
AI+/- PD
27
90
27
91
28
92
28
93
28
94
29
95
29
96
29
97
29
98
30
99
284
945
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AS 22 Accounting for Taxes on Income
Case Study - No. 3
ABCL reported Accounting income of Rs. 9 Crores for FY 2004-05.
The following data are provided:
Sales tax not paid until filing of Return of Income
Income from exempted Govt. Bonds
Depreciation as per Books of Accounts
Depreciation as per Income Tax Act
Disallowance U/s. 40A(3)
(Rs. In
Crores)
CT
DT
3.00
2.00
5.00
10.00
1.00
+
+
+
TD
PD
}Difference
}is TD
PD
Compute:
1. CT
IT on TI
TI =
2. DT IT on +/- TD
3. TE CT - DT
TD =
(9+3-2+5-10+1) = 6 CT = 35% of 6 = 2.10
[(3+(5-10)] = -2
DTL = 30% of -2 = - 0.60
2.10 - (-0.60) or 2.10 + 0.60 = 2.70
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AS 22 Accounting for Taxes on Income
AS - 22 - Taxes on Income
CASE STUDY -4
Computation of Deferred Tax
Deferred Tax Liability for earlier years
Deferred Tax Liability for the current year
31.3.2005 31.3.2004
(Amt in Rs.)
2393768
372917
2766685
1590784
802984
2393768
TD Liability:
DT @
DT @
Relating to fixed asset:
31.3.2005 33.66% 31.3.2004 35.875%
WDV as per Companies Act 29849597
20063103
WDV as per Income Tax. Act 21630092
13390579
8219505
6672524
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AS 22 Accounting for Taxes on Income
DTA v/s DTL
Accounting Income > Taxable Income
Create DTL
Accounting Income < Taxable Income
Reversal of DTL or Creation of DTA s.t PRUDENCE
Accounting Income = Taxable Income
Neither DTA nor DTL
Accounting Loss = Taxable Loss
Create DTA subject to PRUDENCE
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AS 22 Accounting for Taxes on Income
Scope of AS 22
Taxes on income include all domestic and
foreign taxes, which are based on taxable
income
Does not cover Dividend Distribution Tax.
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AS 22 Accounting for Taxes on Income
Recognition of Deferred Tax Asset
Consideration of PRUDENCE is a must while recognizing DTA
DTA Arising due to
Basis of Recognition
Unabsorbed Business Virtual Certainty (Judgment) &
& Depreciation Loss Convincing Evidence (Fact)
ASI 9
Other than above
Reasonable Certainty
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AS 22 Accounting for Taxes on Income
Re-Assessment v/s Review
Re-Assessment
(Right)
Relates to DTA
Previously unrecognized
Review
(Duty)
Relates to DTA
Previously recognized
Not a prior period item as per AS-5 unless it was a mistake
AS 22 does not mention review or re-assessment of DTL
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AS 22 Accounting for Taxes on Income
Transitional Provisions
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
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AS 22 Accounting for Taxes on Income
Presentation of DT
Balance Sheet (ASI-7)
Share capital
Reserves
Secured loans
Unsecured loans
Deferred tax liability
Total
Fixed assets
Investments
Deferred 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
Repairs & Maintenance
Selling, General & Administration Expenses
Interest
Depreciation
TOTAL - II
III. PROFIT BEFORE TAX (I-II)
IV. Provision for Current Taxation
Provision for Deferred Tax
Provision for Fringe Benefit Tax
V. Profit after Tax (III - IV)
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AS 22 Accounting for Taxes on Income
Disclosure
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.
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AS 22 Accounting for Taxes on Income
Presentation of CT - Para 27
An Enterprise should offset assets and
liabilities representing current tax if the
enterprise:
a) has a legally enforceable right to set off
the recognized amounts; and
b) intends to settle the asset and the
liability on a net basis
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Accounting Standard 22
Accounting for Taxes on Income
ISSUES
&
LATEST DEVLOPMENTS
AS 22 Accounting for Taxes on Income
Timing Difference – Ex..
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)
Exchange fluctuation of FC liability incurred for FA
purchase. - As-11(R) Vs. Sch.VI Vs. S. 43A
Up to Rs. 5000 assets write off under Companies Act
Impairment Loss as per AS-28
Sale Proceeds Cr. to Block of Asset as per IT Act Vs. Profit /
Loss on sale of FA’s recognised in P&L A/c
Purchase of Scientific Research Assets [35(2)]
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AS 22 Accounting for Taxes on Income
Timing Difference – Ex….
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
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AS 22 Accounting for Taxes on Income
Timing Difference – Ex..
Provision for doubtful debts / advance
Provision for warranties
Preliminary expenses written off fully when
incurred (U/s 35D)
Expenses amortized in books of Accounts
over a period of years but a shorter or
longer period is allowable for tax purposes
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AS 22 Accounting for Taxes on Income
Permanent Difference – Ex...
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
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AS 22 Accounting for Taxes on Income
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)
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AS 22 Accounting for Taxes on Income
(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)
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AS 22 Accounting for Taxes on Income
Issues relating to DTA / DTL:
(1) Accounting for Taxes on Income in case of an
Amalgamation as per AS-14 (ASI 11)
(2) Is it OK not to recognize DTL on the ground
that the enterprise intends to carry out a major
capital expansion programme in near future?
(3) Is it OK not to recognize DTL on the ground
that the company expects that there will be
losses both for accounting and tax purposes in
near future?
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AS 22 Accounting for Taxes on Income
Issues relating to DTA / DTL:
(4) Accounting for Taxes on Income in Interim
Financial Reports as per AS-25
(5) Accounting for Taxes on Income in
Consolidated Financial Statements as per AS21
ASI 26 : Total TE = TE in Parent Co + TE in
Subsidiary Co.
 GC 18/2002 : DT in CFS = simple aggregation
of DT balances across the group
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AS 22 Accounting for Taxes on Income
Issues relating to DTA / DTL:
(6)
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
(7)
ASI 5: Accounting for Taxes on Income in the
situation of Tax Holiday U/S 10A and 10B of the
Income-tax Act,1961
(8)
ASI 4: Losses under the head Capital Gains
(9)
ASI 6: Accounting for Taxes on Income in the
context of S. 115JB of the Income-tax Act, 1961 –
MAT credit – whether Current Tax ?
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AS 22 Accounting for Taxes on Income
Case Study - No. 5
Computation of Curre nt Tax and De fe rre d Tax unde r S.80IA/80IB/80IC
Ye ar De pre ciation
TD
CT
De fe rre d Accumulated
Tax
Books
IT
@ 30%
Tax
DTL/DTA
Expe nse
(a)
(b)
(c)
(d)=(c-b)
(e ) (f)=(d*30%)
(g)
(h)=(e +f)
1
100
375
275 (O)
0
14
14
14
2
100
281
181 (O)
0
54
68
54
3
100
211
111 (O)
0
33
102
33
4
100
158
58 (O)
0
17
119
17
5
100
119
19 (O)
0
6
125
6
6
100
89
(11) (R)
0
0
125
0
7
100
67
(33) (R)
0
0
125
0
8
100
50
(50) (R)
0
0
125
0
9
100
38
(62) (R)
0
0
125
0
10
100
28
(72) (R)
0
0
125
0
11
100
21
(79) (R)
294
(24)
101
270
12
100
16
(84) (R)
295
(25)
76
270
13
100
12
(88) (R)
296
(26)
49
270
14
100
9
(91) (R)
297
(27)
22
270
15
100
7
(93) (R)
298
(28)
(6)
270
-3
-10
-15
-19
-22
-69
Note: Deferred Tax, for the first year, is calculated after considering the reversal within 10 years.
I.e
275
(229) 46 @ 30% =
-69
14
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AS 22 Accounting for Taxes on Income
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
- Catch 22 standard
- A Tough job for CAs certifying on DT.
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AS 22 Accounting for Taxes on Income
THE BEGINNING
K. GURURAJ ACHARYA
TELFAX: 080-2336 1800
[email protected]
K.G.Acharya & Co., Chartered Accountants
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