1. Taxes on Income
AS-22
By
Shankar Bose
Inspector of Income-tax
MSTU, Puri

2. Taxes on Income
• Accounting income and taxable income for a
period are seldom the same
• Differences between the two are on account
of:
– Permanent Differences
– Timing Differences

3. Permanent Differences
• Permanent differences are those which arise
in one period and do not reverse
subsequently, e.g., an income exempt from
tax or an expense that is not allowable as a
deduction for tax purposes

4. Timing Differences
• Timing differences are those which arise in
one period and are capable of reversal in one
or more subsequent periods.

5. Timing Differences
• Year 1 Year 2 Year 3
• Profit before dep. 300 300 300
• Depreciation (SLM) 100 100 100
• Profit before tax 200 200 200
• Taxable Income NIL 300 300
• Tax Provision(30%) NIL 90 90
• Net Profit 200 110 110

6. Timing differences
• Timing differences cause a distortion in
computation of results of operations for a
period with consequent effect on balance
sheet if their future tax effects are not
accounted for.

7. Timing Differences
• Examples of Timing differences:
– expenditure covered by section 43B of Income-tax
Act
– expenditure deferred in accounts but allowed fully
for tax purposes in year of incurrence
– provisions made in accounts but allowed for tax
purposes only when liabilities actually crystallise in
a subsequent year

8. Timing Differences
• Examples of timing differences (contd.)
– differences in depreciation charge due to
differences in depreciable amount, depreciation
rate or method, or the manner of calculating
depreciation
– income recognized in accounts but taxed in later
years, e.g., interest accrued but not due on
investments
• Taxable v. Deductible timing differences

9. AS 22
• AS 22 seeks to redress the distortions
caused by traditional method of accounting
for income-taxes (‘taxes payable method’) by
requiring the adoption of deferred tax
accounting in respect of timing differences
• Timing differences v. Temporary differences

10. AS 22
• Supersedes the earlier Guidance Note
• Becomes mandatory in a phased manner

11. Date of Mandatory Application
– Mandatory in respect of financial years
commencing April 1, 2001, for enterprises listed/in
the process of listing, and for all enterprises of a
group where parent presents consolidated
financial statements and any of the enterprises is
listed/in the process of listing
– In respect of companies not covered above,
mandatory in respect of accounting periods
commencing April 1, 2002

12. Date of Mandatory Application
– In respect of all other enterprises, mandatory in
respect of accounting periods commencing April 1,
2003
– Can an enterprise apply the Standard from an
earlier date?

13. Treatment of Taxes on Income
• Tax expense (saving) should be included in
determining net income
• Tax expense (saving) should comprise
– Current tax (I.e., provision for tax payable as
computed traditionally), and
– Tax effects of all timing differences, subject to
consideration of prudence in recognition of
deferred tax assets

14. Recognition of Timing Differences
• Deferred tax assets should be recognized
and carried forward only if their realization is
reasonably certain, I.e., sufficient future
taxable income is likely to be available for
offset.
• However, in the event of there being
unabsorbed depreciation or carried forward
tax losses, deferred tax assets can be
recognized only if their realization is virtually
certain based on convincing evidence

15. Recognition of Timing Differences
• Unrecognized deferred tax assets need to be
re-assessed at each balance sheet date.
Previously unrecognized assets are to be
recognized if reasonable/virtual certainty, as
the case may be, of realization is now
available

16. Recognition of Timing Differences
• Tax effect of accumulated timing differences
to be recalculated every year using tax rates
and tax laws that have been enacted or
substantially enacted
• In case of slab rates, average rate to be
used.
• Discounting of deferred tax assets/liabilities
not permitted

17. Review of Deferred Tax Assets
• Carrying amount of deferred tax assets
should be reviewed at each balance sheet
date and to the extent the realization is not
reasonably/virtually certain, the asset should
be written down. Such write-down may be
subsequently reversed to the extent
realization becomes reasonably/virtually
certain

18. Disclosure
• Assets and liabilities representing current tax
should be offset if:
– legal right of set off exists;
– assets and liabilities are intended to be settled on
a net basis

19. Disclosure
• Assets and liabilities representing deferred
tax should be offset if:
– legal right of set off exists;
– assets and liabilities relate to taxes levied by same
governing taxation laws
• Deferred tax assets and liabilities to be
distinguished from current tax, current assets
and current liabilities and presented under a
separate heading in balance sheet

20. Disclosure
• Disclose major components of deferred tax
assets and liabilities
• Disclose nature of evidence supporting
recognition of deferred tax assets in the event
of there being unabsorbed depreciation or
carried forward tax losses

21. Transitional Provisions
• On first implementation of the standard, the
net deferred tax balance accumulated prior to
adoption of the standard should be adjusted
against revenue reserves

22. Thanks