SUB REGIONAL CONFERENCE & 19 th ANNUAL CONFERENCE of HUBLI BRANCH D eferred Taxation AS 22 and Latest Developments K.GURURAJ ACHARYA CHARTERED ACCOUNTANT.

SUB REGIONAL CONFERENCE &19th ANNUAL CONFERENCE of

HUBLI BRANCH

Deferred Taxation AS 22 and Latest Developments

K.GURURAJ ACHARYACHARTERED ACCOUNTANT

TELEFAX: (080) 2336 1800 [email protected]

K.G.Acharya & Co., Chartered Accountants 2 of 36

AS 22 Accounting for Taxes on IncomeAS 22 Accounting for Taxes on Income

ICAI Statements

Standards(Mandatory)

Guidance Notes(Recommendatory)

Auditing & Assurance Standards (SAP)

( 32 + 2 )

AccountingStandards( 29 + 1 )

A S I (29){7 of AS 22}

General Clarification (18)



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.

Accounting Standards u/s.211(3c)

(wef 31.10.1998)



Deviation from AS4.(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



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.

Level - I

Enterprises with > 40 Lacs but < 50 crores Turnover.

> 1 crore but < 10 crores borrowings Holding & subsidiary cos of above.

Level - II

Other than Level - I & Level - II casesLevel - IIIw.e.f 17-Sep-2003



Companies listed and in the process of listing in India - including Group companies.

01.04.2001

In respect of other companies not covered above.

01.04.2002

In respect of all other enterprises. 01.04.2004

01.04.2006

Applicability of AS 22

(For All Levels - I / II/ III)



Deferred Taxes are ‘Income Tax’ which arise in one period but because of Timing Difference will have to be actually paid in later years.

“Deferred Tax”



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.



“Deferred Tax ”

Current Tax(applicable rate/law)

Deferred Tax(substantively enacted

rates /law) Average rate ?

No Tax effect

TaxExpense

TaxableIncome

As per IT Return

Rs. 70 cr

TimingDifferenceRs. 20 cr

PermanentDifference

Rs. 10 cr

AccountingIncome

As per P&L A/c

Rs. 100 cr



“Deferred Tax ”

Current Tax

TaxableIncome

As per IT Return

Rs. 90 cr

AccountingIncome

As per P&L A/c

Rs. 80 cr

TimingDifferenceReversal or DTA

Rs. 20 cr

(DTL)or

DTA Prudence

PermanentDifference

Rs. 10 cr

No Tax effect



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

Computation of DT



Case Study -1 Computer Pur. value Tax Rate(Rs. In Crores) Co's Act IT Act

50 40% 60% 30%As as 31st March 1 2 3 4 5 6 7 8 9 10

PBT - AI 100 100 100 100 100 100 100 100 100 100 1000Add: Depreciation - A/c's 20 12 7 4 3 2 1 1 0 0 50Less: Depreciation - IT 30 12 5 2 1 0 0 0 0 0 50Total Income - TI 90 100 102 102 102 101 101 101 100 100 1000

TD-being Depn differential -10 0 2 2 2 1 1 1 0 0 0

CT -30% of IT 27 30 31 31 31 30 30 30 30 30 300DT-30% of TD -3 0 1 1 1 0 0 0 0 0 0Tax Exp.(CT-DT) 30 30 30 30 30 30 30 30 30 30 300

TE= IT on (AI+/-PD) 30 30 30 30 30 30 30 30 30 30 300

Depreciation Rate



(Rs. In Crores) Co's Act IT Act50 40% 60% 30%

As as 31st March 1 2 3 4 5 6 7 8 9 10PBT - AI 100 100 100 100 100 100 100 100 100 100 1000Add: Depreciation - A/c's 20 12 7 4 3 2 1 1 0 0 50 43B disallowance 5 0 7 0 0 0 9 0 0 0 21 40A(3) disallowance 10 11 12 13 14 15 16 17 18 19Less: Depreciation - IT 30 12 5 2 1 0 0 0 0 0 50 43B disallowance 0 5 0 0 7 0 0 0 9 0 21 Sec.10 exemption 20 20 20 20 20 20 20 20 20 20Total Income - TI 85 86 101 95 89 96 106 98 89 99 1000

TD -5 -5 9 2 -5 1 10 1 -9 0 0

CT -IT on TI 26 26 30 29 27 29 32 29 27 30 283DT-30% of TD -2 -2 3 1 -2 0 3 0 -3 0 0Tax Exp.(CT-DT) 27 27 28 28 28 29 29 29 29 30 284

TE= IT on (AI+/-PD) 27 27 28 28 28 29 29 29 29 30 284AI+/- PD 90 91 92 93 94 95 96 97 98 99 945



Case Study - No. 3ABCL reported Accounting income of Rs. 9 Crores for FY 2004-05.The following data are provided:

(Rs. In CT DTCrores)

Sales tax not paid until filing of Return of Income 3.00 + TD

Income from exempted Govt. Bonds 2.00 - PDDepreciation as per Books of Accounts 5.00 + }Difference

Depreciation as per Income Tax Act 10.00 - }is TD

Disallowance U/s. 40A(3) 1.00 + PD

Compute:

1. CT IT on TI TI = (9+3-2+5-10+1) = 6 CT = 35% of 6 = 2.10

2. DT IT on +/- TD TD = [(3+(5-10)] = -2 DTL = 30% of -2 = - 0.60

3. TE CT - DT 2.10 - (-0.60) or 2.10 + 0.60 = 2.70


AS 22 Accounting for Taxes on IncomeAS 22 Accounting for Taxes on Income AS - 22 - Taxes on Income

CASE STUDY -4Computation of Deferred Tax 31.3.2005 31.3.2004

Deferred Tax Liability for earlier years 2393768 1590784Deferred Tax Liability for the current year 372917 802984

2766685 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

(Amt in Rs.)



Accounting Income > Taxable IncomeCreate DTL

Accounting Income < Taxable IncomeReversal of DTL or Creation of DTA s.t PRUDENCE

Accounting Income = Taxable IncomeNeither DTA nor DTL

Accounting Loss = Taxable LossCreate DTA subject to PRUDENCE

DTA v/s DTL



Scope of AS 22Taxes on income include all domestic and foreign taxes, which are based on taxable income

Does not cover Dividend Distribution Tax.



Recognition of Deferred Tax Asset

Consideration of PRUDENCE is a must while recognizing DTA

DTA Arising due to Basis of Recognition

Unabsorbed Business & Depreciation Loss

Virtual Certainty (Judgment) &

Convincing Evidence (Fact)ASI 9

Other than above Reasonable Certainty



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

Re-Assessment v/s Review

Re-Assessment(Right)

Review(Duty)

Relates to DTA Previously unrecognized

Relates to DTA Previously recognized



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



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. INCOMEGross SalesLess: Excise DutyNet SalesOther Income

TOTAL - III. EXPENDITUREMaterial CostEmployees' Remuneration & BenefitsManufacturing ExpensesRepairs & MaintenanceSelling, General & Administration ExpensesInterestDepreciation

TOTAL - IIIII. PROFIT BEFORE TAX (I-II)IV. Provision for Current Taxation Provision for Deferred Tax Provision for Fringe Benefit TaxV. Profit after Tax (III - IV)



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.

Disclosure



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

Accounting Standard 22

Accounting for Taxes on Income

ISSUES &

LATEST DEVLOPMENTS



Difference in net block of fixed assets between tax and accounts -

Difference in Depreciation due toDifferent rates / methodsPro 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-28Sale Proceeds Cr. to Block of Asset as per IT Act Vs. Profit / Loss on sale of FA’s recognised in P&L A/cPurchase of Scientific Research Assets [35(2)]

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

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

Timing Difference – Ex..



Amortization of goodwill considered as disallowable expensePersonal expenditure disallowed by tax authoritiesPenalty (Not being compensatory)Payments disallowed U/s 40(A)(3) Donations disallowed U/s 80GRemuneration to partners disallowed U/s 40(b)Scientific research expenditure.(only weighted element)Exemptions u/s 10/10A/10BDeductions U/s 80IA / IB / IC Financial Lease - Circular No. 2 (dtd. 9th Feb 2001 – post AS 19 tax position)Additional Depreciation on Revaluation

Permanent Difference – Ex...



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)



(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)



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?



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 AS-21 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



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 ofTax 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 ?



Case Study - No. 5Computation of Current Tax and Deferred Tax under S.80IA/80IB/80ICYear TD CT Deferred Accumulated Tax

Books IT @ 30% Tax DTL/DTA Expense(a) (b) (c) (d)=(c-b) (e) (f)=(d*30%) (g) (h)=(e+f)

1 100 375 275 (O) 0 14 14 142 100 281 181 (O) 0 54 68 543 100 211 111 (O) 0 33 102 334 100 158 58 (O) 0 17 119 175 100 119 19 (O) 0 6 125 66 100 89 (11) (R) 0 0 125 0 -37 100 67 (33) (R) 0 0 125 0 -108 100 50 (50) (R) 0 0 125 0 -159 100 38 (62) (R) 0 0 125 0 -19

10 100 28 (72) (R) 0 0 125 0 -22 -6911 100 21 (79) (R) 294 (24) 101 27012 100 16 (84) (R) 295 (25) 76 27013 100 12 (88) (R) 296 (26) 49 27014 100 9 (91) (R) 297 (27) 22 27015 100 7 (93) (R) 298 (28) (6) 270

Note: Deferred Tax, for the first year, is calculated after considering the reversal within 10 years.

I.e 275 (229) 46 @ 30% = 14-69

Depreciation



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.



K. GURURAJ ACHARYATELFAX: 080-2336 [email protected]

THE BEGINNING

SUB REGIONAL CONFERENCE & 19 th ANNUAL CONFERENCE of HUBLI BRANCH D eferred Taxation AS 22 and Latest Developments K.GURURAJ ACHARYA CHARTERED ACCOUNTANT.

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