AS 22 - ACCOUNTING FOR TAXES ON INCOME

(Mandatory for all enterprises at all levels from 01.04.06)

Does not deal with taxes on distribution of dividends

Objective
To prescribe accounting treatment for taxes on income under tax effect method
thereby enabling matching of accounting profits and taxes thereon.

Important Definitions

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.

Permanent differences are the differences between taxable income and accounting
income for a period that originate in one period and do not reverse subsequently.

Deferred tax is the tax effect of timing differences.

Recognition

⇒ The differences between taxable income and accounting income should be

classified into permanent differences and timing differences.

⇒ The tax effect of permanent differences should be ignored.

⇒ The tax effect of timing differences should be recognized as deferred tax

assets/liabilities and carried forward in the books

(DTAs are 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 realized)
⇒ Tax expense for the period, comprising current tax and deferred tax, should be
charged/credited in the P/L. Account.

Measurement
 CURRENT TAX DEFERRED TAX

Deferred tax assets and liabilities

At rates applicable to the should be measured using the tax rates
and tax laws that have been enacted or
year substantively enacted by the balance
sheet date.(When different tax rates
apply to different levels of taxable
income, average rate should be used)

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

balance sheet date.

• DTA should be written down if there is uncertainty about sufficient

future taxable income. Such write-down may be reversed when it
becomes reasonably certain that sufficient future taxable income will be
available.

Presentation and Disclosure

• An enterprise should offset assets and liabilities representing current tax and
deferred taxes if the enterprise has a legally enforceable right and the
intention to set off .

• Break-up of deferred tax assets and deferred tax liabilities into major
components should be disclosed in the notes to accounts.

• Nature of the evidence supporting the recognition of deferred tax assets should
also be disclosed

Accounting for Taxes on Income

 How to get started

Identify TIMING DIFFERENCES between Accounting

Records & Tax records by comparing WDV of assets and
verifying the IT computation statements
↓
Recognise tax effect of timing differences upto the
beginning of the year as DTAs/DTLs
↓
Account for them by credit/charge to Revenue
Reserves
↓
Recognise tax effect of timing differences of the
current year as DTAs/DTLs
↓
Account for them by credit/charge to Profit &
Loss Account
↓
Disclose change in accounting policy and the effect
thereof.

Interpretations (ASIs) on AS 22
Treatment during tax holiday period ( Sections 10A/10B, 80 IA/80 IB)
 • The deferred tax in respect of timing differences which originate
during the tax holiday period and reverse during the tax holiday
period should not be recognized to the extent the enterprise’s gross
total income is subject to the deduction/exemption.

• The deferred tax in respect of timing differences which originate

during the tax holiday period and reverse after the tax holiday
period should be recognized in the year in which they originate.

• The timing differences which originate first should be considered to

reverse first.

Loss under the head Capital Gains

• Deferred Tax asset in respect of capital losses should be recognised
and carried forward only to the extent that there is virtual certainty
supported by convincing evidence about future capital gains.

Treatment in a MAT Situation

• Deferred Tax arising from timing differences arising during a MAT

period should be measured using the regular rates and not the MAT
rate.

• If an enterprise expects that the timing differences arising in the

current period would reverse in a period in which it may pay tas
under MAT, the DTA/DTL arising in the current period should be
measured using the regular rates and not the MAT rate.

Disclosure

• Deferred Tax Assets should be disclosed after Investments but before Current
Assets. Deferred Tax Liabilities should be disclosed after unsecured loans,
separately.

Virtual Certainty

• Virtual Certainty should be based on conclusive reliable evidence.