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Deferred Taxation AS 22 and
Latest Developments
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Accounting Standard means the standard ofaccounting:
Recommendedby ICAI and
Prescribedby Government inConsultation with the NACAS constituted u/s
210A(1) of the Companies Act, 1956.
Accounting Standardsu/s.211(3c)(wef 31.10.1998)
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Deviation from AS4.(d) In our opinion, the Balance Sheet, P&L Account and theCash Flow Statement dealt with by this report comply withthe AS referred to in Sec. 211(3C) of the Companies Act,1956 subject to the following observations:
Certain Transactions are accounted on cash basis videsignificant 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 10on Fixed Assets. Certain transaction accounted under this policy
has the effect ofoverstating value of Fixed Assets, Depreciation
and profit by Rs. 2.05 Crores, Rs. 0.16 Crores and Rs. 1.89
Crores respectively
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Companies listed and in the process of listing in India -
including Group companies.
01.04.2001
In respect of other companies notcovered above.
01.04.2002
In respect of all other enterprises. 01.04.2004
01.04.2006
Applicability ofAS 22(For All Levels -I/II/III)
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Deferred Taxes are Income Tax which
arise in one periodbut because ofTiming
Difference will have to be actually paid in
later years.
Deferred Tax
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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 oneperiod and do not reverse subsequently.
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Deferred Tax
Current Tax(applicable rate/law)
Deferred Tax
(substantively enactedrates /law)Average rate ?
No Tax effect
Tax
Expense
Taxable
IncomeAs per IT ReturnRs. 70 cr
Timing
Difference
Rs. 20 cr
Permanent
DifferenceRs. 10 cr
Accounting
IncomeAs per P&L A/c
Rs. 100 cr
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Deferred Tax
Current Tax
Taxable
IncomeAs per IT Return
Rs. 90 cr
Accounting
IncomeAs per P&L A/c
Rs. 80 cr
Timing
Difference Reversal or DTA
Rs. 20 cr
(DTL)or
DTAPrudence
Permanent
DifferenceRs. 10 cr
No Tax effect
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STI
AI
+/- PD+/- TD
TI
CT = IT on TIp (Applicable tax rates/laws)DT = IT on (+\- TD)p(Latest known tax rates/laws)
TE = CT DT(MAT - CT) is to be finally added to TE as a special case
Computation of DT
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1 Computer Pur. value Tax Rate
(Rs. In Crores) Co's Act IT Act50 0% 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: epreciation - A/c's 20 12 7 3 2 1 1 0 0 50
Less: epreciation - 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
T -being epn 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 300T-30% of T -3 0 1 1 1 0 0 0 0 0 0
Tax Exp.(CT- T) 30 30 30 30 30 30 30 30 30 30 300
TE= IT on (AI+/-P ) 30 30 30 30 30 30 30 30 30 30 300
epreciation Rate
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AS - 22 - Taxes on Income
AS STU Y -om a on of efe e Tax 3132 5 3132
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
(Amt in Rs.)
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Accounting Income > Taxable Income
Create DTL
Accounting Income < Taxable IncomeReversal 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
DTA v/s DTL
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Scope of AS 22Taxes on income include all domestic and
foreign taxes, which are based on taxable
income
Does not cover Dividend Distribution Tax.
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Recognition of Deferred Tax AssetConsideration ofP DENCE is a must while recognizing DTA
DTAArising due to Basis of ecognitionUnabsorbed Business
& Depreciation Loss
Virtual Certainty (Judgment) &
Convincing Evidence (Fact)
ASI 9
Other than above easonable Certainty
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Not a prior period item as perAS-5 unless it was a mistake
AS 22 does not mention review or re-assessment ofDTL
Re-Assessment v/s Review
e-Assessment
( ight)
eview
(Duty)
elates to DTA
Previously unrecognized
elates to DTA
Previously recognized
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Transitional ProvisionsOn the first occasion, the enterprise should
recognize, the deferred tax balance that has
accumulated prior to adoption of this statementas DTA/DTL with the corresponding
credit/charge to the revenue reserves.
Non Corporate Entities Capital Account
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Presentation of DT
Balance Sheet(ASI-7)Share capital
eserves
Secured loans
nsecured loans
Deferred tax liability
Total
Fixed assets
Investments
Deferred tax asset
Net Current Assets
Total
PROFIT AND LOSS ACCOUNT
I. INCOME
Gross Salesess: xc se u y
Net Sales
Other Income
TOTAL - I
II. EXPENDITURE
Material Cost
Employees' Remuneration & Benefits
Manufacturing Expenses
Repairs & Maintenancee ng, enera m n strat on xpenses
Interest
DepreciationTOTAL - II
III. PROFIT BEFORE TAX (I-II)
IV. Provision for Current Taxation
Provision for Deferred Tax
Provision for Fringe Benefit Tax
V. Profit after Tax (III - IV)
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Break-up of major components of DTA / DTL to
be disclosed.
DTA and DTL to be set off if permissible undertax laws but to be shown separately otherwise.
Evidence supporting the recognition of DTA to
be disclosed, if an enterprise has nabsorbed
Depreciation / Tax Losses to be carried forward.
Disclosure
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Presentation ofC
T - Para 27An Enterprise should offset assets and
liabilities representing current tax if the
enterprise
a) has a legally enforceable right to set off
the recognized amounts; andb) intends to settle the asset and the
liability on a net basis
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Accounting Standard 22
Accounting for Taxes onIncome
ISSUES
&
LATEST DEVLOPMENTS
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Difference in net block of fixed assets between taxand 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 FApurchase. - As-11(R) Vs. Sch.VI Vs. S. 43A
p 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 FAs recognised in P&L A/c
Purchase of Scientific Research Assets [35(2)]
Timing Difference Ex..
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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 /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.
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Provision for doubtful debts / advance
Provision for warranties
Preliminary expenses written off fully whenincurred (U/s 35D)
Expenses amortized in books of Accounts
over a period of years but a shorter orlonger period is allowable for tax purposes
Timing Difference Ex..
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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/10BDeductions U/s 80IA / IB / IC
Financial Lease - Circular No. 2 (dtd. 9th Feb 2001 post AS 19tax position)
Additional Depreciation on Revaluation
Permanent Difference Ex...
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FinancialImplication 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 BIFRpurposes
(4) Affects Debt -Equity Ratio and TOL / TNW
(Double edged sword)
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(6) Affects Net Profit Ratio (PAT/Net Sales)
(7) Affects EPS
(8) Affects Dividend declaration - No specificreference 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)
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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?
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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
ASI26 : Total TE = TE in Parent Co + TE in
Subsidiary Co. GC18/2002: DT in CFS = simple aggregation
ofDT balances across the group
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Issues relating to DTA / DTL:(6) ASI 3: Accounting for Taxes on Income in the
situations ofTax Holiday U/S80-IA and 80-IB of theIncome-tax Act, 1961
(7) ASI 5: Accounting for Taxes on Income in thesituation ofTax Holiday U/S 10A and 10B of theIncome-tax Act,1961
(8) ASI 4: Losses under the head Capital Gains
(9) ASI 6: Accounting for Taxes on Income in thecontext ofS. 115JB of the Income-tax Act, 1961
AT credit whether Current Tax ?
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AS 22 C
onclusion- Increases transparency atching / accrualconcept upheld
- Tax effect Accounting - ensures that Tax Charge infuture accounting periods is not vitiated by TimingDifferences
- Aligns our AS with global AS
- Catch 22 standard
- A Tough job for CAs certifying on DT.
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