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AS 22 - Accounting for Taxes on Income

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Laxmi Navlani

AS 22
Income from Business & Profession
Income Tax

The objective of Accounting standard 22 (AS 22) is to prescribe accounting treatment of taxes on income. Taxable income may be different from the accounting income causing problems in matching taxes against revenue for a period.

Types of Income

Taxable income may be different from the accounting income due to various reasons as follows:

Above differences are of two types:

  1. Timing Difference
  2. Permanent Difference

To calculate and recognize such difference in Financial Statement is an object of this standard.

What is Timing Difference?

Timing difference are differences that originate in one period and get adjust or reversed in subsequent period. Some example of timing differences are as follows:

What is Permanent Difference?

Permanent difference are the differences between Taxable income and Accounting income for a period that originate in one period and do not reverse subsequently. Some example of permanent differences are as follows:

  1. Amortization of goodwill considered as disallowable expense for computing Taxable income
  2. Personal expenditure disallowed by tax authorities
  3. Penalty (Not being compensatory) is disallowable expense for computing Taxable income
  4. Payments disallowed U/s 40(A)(3) of Income Tax Act
  5. Donations to the extent not allowed for computing Taxable income
  6. Remuneration to partners disallowed U/s 40(b) of Income Tax Act

Application of AS 22

AS 22 requires recognition of deferred tax for all timing differences. This is based on the matching principle that the financial statements for a period should recognize the effect of all the transactions during the year , whether current or deferred.

So, AS 22 is applicable when there are differences between taxable income and accounting income. If taxable income is greater than accounting income, then it will result in deferred tax asset. And if accounting income is greater than taxable income, then it will result in deferred tax liability.

What is Deferred Tax Asset?

Deferred Tax Asset (DTA) arises when the income as per Income tax Act is higher than the income as per Profit & Loss account. Therefore, tax payable is more due to higher income as per Income Tax Act but actual income as per Profit & Loss account is less.

Moreover, DTA is an asset is created in books of accounts since some amount of tax is paid in advance for which benefit will be received in future.

What is Deferred Tax Liability?

Deferred Tax Liability (DTL) arises when the income as per Income tax Act is lower than the income as per Profit & Loss account. Therefore, tax payable is less due to lower income as per Income Tax Act but actual income as per Profit & Loss account is more.

Moreover, DTL is a provision created in books since amount of taxpaid is less than actual amount as per books and the same is to be paid in future years.

Computation of DTA/DTL

Computation of Accounting Income Year
Particulars One Two Three
Profit Before Depreciation & Tax 2,00,000 2,50,000 200,000
Less: Depreciation -20,000 -20,000 -30,000
Accounting Profit (PBT)   (A) 180,000 230,000 170,000
Computation of Taxable Income Year
Particulars One Two Three
Accounting Profit (PBT)   (A) 180,000 230,000 170,000
Add: Depreciation as per books 20,000 20,000 30,000
Less: Depreciation as per income tax Act -70,000
Taxable Profit 130,000 250,000 200,000
Tax rate 30% 30% 30 %
Current tax 39,000 75,000 60,000
Deferred Tax Computation Year
Particulars One Two Three
Opening balance of timing difference -50,000 -30,000
Addition -50,000
Deletion 20,000 30,000
Closing Balance -50,000 -30,000
Tax rate 30% 30% 30 %
Deferred Tax -15,000 -6,000
DTA/DTL to be shown in Balance Sheet DTL DTL NIL
Amount for P&L -15,000 6,000 9,000
To be Debited/Credited to P&L Debited Credited Credited
Reason for Debit/Credit Creation of DTL Reversal of DTL Reversal of DTL
Tax Expense in books Year
Particulars One Two Three
Current Tax 39,000 75,000 60,000
Deferred Tax 12,000 -6,000 -9,000
Total Tax 54,000 69,000 51,000
Accounting Profit (PBT)   (A) 180,000 230,000 170,000
Profit After Tax (A-B) 126,000 161,000 119,000

FAQs

How to measure the deferred tax asset and liability?

Deferred tax should be measured using the tax rates and tax laws prevailing as on balance sheet date.

Is deferred tax calculated on permanent differences?

No, deferred tax is calculated only on timing differences.

What type of account is income tax payable?

Income tax payable is a type of account in the current liabilities section of a company’s balance sheet. It is compiled of taxes due to the government within one year.

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