AS 22 by benbenzhou

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									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
   acharyaguru@yahoo.com
                 AS 22 Accounting for Taxes on Income


                             ICAI Statements

               Standards                              Guidance Notes
               (Mandatory)                           (Recommendatory)

     Accounting                 Auditing & Assurance
     Standards                    Standards (SAP)
      ( 29 + 1 )                       ( 32 + 2 )


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

             K.G.Acharya & Co., Chartered Accountants   3 of 36
                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
                  K.G.Acharya & Co., Chartered Accountants    4 of 36
                 AS 22 Accounting for Taxes on Income


               Listed/Proposed to be listed Cos
Level - I      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 - II     Enterprises with > 40 Lacs but < 50 crores
                Turnover.
               > 1 crore but < 10 crores borrowings
               Holding & subsidiary cos of above.

Level - III    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
             K.G.Acharya & Co., Chartered Accountants           6 of 36
        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.


             K.G.Acharya & Co., Chartered Accountants   8 of 36
                   AS 22 Accounting for Taxes on Income



                    “Deferred Tax ”
                  Taxable                         Current Tax
                  Income                       (applicable rate/law)
Accounting
                 As per IT Return                                         Tax
                   Rs. 70 cr
 Income                                                                 Expense
As per P&L A/c
                    Timing                     Deferred Tax
 Rs. 100 cr       Difference                (substantively enacted
                   Rs. 20 cr               rates /law) Average rate ?
                 Permanent
                                                No Tax effect
                 Difference
                  Rs. 10 cr

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               AS 22 Accounting for Taxes on Income



               “Deferred Tax ”
                Accounting
                 Income                  Taxable
                As per P&L A/c
                                         Income
                                      As per IT Return       Current Tax
                  Rs. 80 cr
                                         Rs. 90 cr
                 Timing
  (DTL)                                Permanent
     or         Difference
                Reversal or DTA        Difference           No Tax effect
DTA Prudence       Rs. 20 cr              Rs. 10 cr


                 K.G.Acharya & Co., Chartered Accountants           10 of 36
              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
                K.G.Acharya & Co., Chartered Accountants   11 of 36
                             AS 22 Accounting for Taxes on Income

Case Study -1                      Computer Pur. value      Depreciation Rate     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 1000
Add: Depreciation - A/c's     20      12       7       4       3 2          1   1      0      0 50
Less: Depreciation - IT       30      12       5       2       1 0          0   0      0      0 50
Total 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    30 300
DT-30% of TD                  -3 0            1       1 1 0                0     0     0     0    0
Tax 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

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                             AS 22 Accounting for Taxes on Income

                                 (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 1000
Add: 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     19
Less: 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     20
Total 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    283
DT-30% of TD               -2       -2      3       1       -2       0       3      0     -3      0      0
Tax 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    284
        AI+/- PD           90       91     92      93       94      95      96     97     98     99    945
                                 K.G.Acharya & Co., Chartered Accountants                       13 of 36
                    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:
                                                                 (Rs. In   CT      DT
                                                                 Crores)
Sales tax not paid until filing of Return of Income               3.00     +       TD
Income from exempted Govt. Bonds                                  2.00     -       PD
Depreciation 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


                      K.G.Acharya & Co., Chartered Accountants                           14 of 36
                 AS 22 Accounting for Taxes on Income
                                                                AS - 22 - Taxes on Income



CASE STUDY -4
Computation of Deferred Tax                   31.3.2005 31.3.2004
                                                   (Amt in Rs.)

Deferred Tax Liability for earlier years        2393768        1590784
Deferred 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

                    K.G.Acharya & Co., Chartered Accountants                        15 of 36
           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



              K.G.Acharya & Co., Chartered Accountants   18 of 36
               AS 22 Accounting for Taxes on Income


                Re-Assessment v/s Review

    Re-Assessment                                           Review
       (Right)                                              (Duty)


    Relates to DTA                                  Relates to DTA
Previously unrecognized                          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



          K.G.Acharya & Co., Chartered Accountants   20 of 36
               AS 22 Accounting for Taxes on Income

     Presentation of DT
                                      PROFIT AND LOSS ACCOUNT
    Balance Sheet (ASI-7)             I. INCOME
Share capital                         Gross Sales
                                      Less: Excise Duty
Reserves                              Net Sales
                                      Other Income
Secured loans                                TOTAL - I
Unsecured loans                       II. EXPENDITURE
                                      Material Cost
Deferred tax liability                Employees' Remuneration & Benefits
Total                                 Manufacturing Expenses
                                      Repairs & Maintenance
                                      Selling, General & Administration Expenses
                                      Interest
Fixed assets                          Depreciation
Investments                                 TOTAL - II
                                      III. PROFIT BEFORE TAX (I-II)
Deferred tax asset                    IV. Provision for Current Taxation
Net Current Assets                         Provision for Deferred Tax
                                           Provision for Fringe Benefit Tax
Total                                 V. Profit after Tax (III - IV)
                 K.G.Acharya & Co., Chartered Accountants                          21 of 36
          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
             K.G.Acharya & Co., Chartered Accountants   23 of 36
 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

            K.G.Acharya & Co., Chartered Accountants   26 of 36
        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
                K.G.Acharya & Co., Chartered Accountants   28 of 36
               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)

                 K.G.Acharya & Co., Chartered Accountants   29 of 36
                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)


                   K.G.Acharya & Co., Chartered Accountants                    30 of 36
             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?

               K.G.Acharya & Co., Chartered Accountants   31 of 36
            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 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

              K.G.Acharya & Co., Chartered Accountants   32 of 36
               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 ?
                 K.G.Acharya & Co., Chartered Accountants   33 of 36
                            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                       -3
    7    100      67      (33) (R)           0           0          125          0                      -10
    8    100      50      (50) (R)           0           0          125          0                      -15
    9    100      38      (62) (R)           0           0          125          0                      -19
  10     100      28      (72) (R)           0           0          125          0                      -22   -69
  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

Note: Deferred Tax, for the first year, is calculated after considering the reversal within 10 years.
        I.e          275       (229) 46 @ 30% =                    14
                                 -69

                               K.G.Acharya & Co., Chartered Accountants                                 34 of 36
             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.
               K.G.Acharya & Co., Chartered Accountants   35 of 36
        AS 22 Accounting for Taxes on Income



        THE BEGINNING




K. GURURAJ ACHARYA
TELFAX: 080-2336 1800
acharyaguru@yahoo.com
          K.G.Acharya & Co., Chartered Accountants   36 of 36

								
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