Deferred Taxation AS 22 and 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

K.G.Acharya & Co., Chartered Accountants ICAI Statements Standards (Mandatory) Guidance Notes (Recommendatory) Accounting Standards ( 29 + 1 ) Auditing & Assurance Standards (SAP) ( 32 + 2 ) A S I (29) {7 of AS 22} General Clarification (18) K.G.Acharya & Co., Chartered Accountants

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

K.G.Acharya & Co., Chartered Accountants 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

K.G.Acharya & Co., Chartered Accountants 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 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 K.G.Acharya & Co., Chartered Accountants

Applicability of AS 22 (For All Levels - I / II/ III) 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 K.G.Acharya & Co., Chartered Accountants

K.G.Acharya & Co., Chartered Accountants “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. K.G.Acharya & Co., Chartered Accountants

K.G.Acharya & Co., Chartered Accountants 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

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

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

K.G.Acharya & Co., Chartered Accountants 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

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K.G.Acharya & Co., Chartered Accountants AS - 22 - Taxes on Income K.G.Acharya & Co., Chartered Accountants

K.G.Acharya & Co., Chartered Accountants 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 K.G.Acharya & Co., Chartered Accountants

K.G.Acharya & Co., Chartered Accountants 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. K.G.Acharya & Co., Chartered Accountants

K.G.Acharya & Co., Chartered Accountants 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 K.G.Acharya & Co., Chartered Accountants

Re-Assessment v/s Review Previously unrecognized Previously recognized (Right ) Review (Duty) Relates to DTA Previously unrecognized Relates to DTA 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 K.G.Acharya & Co., Chartered Accountants

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

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 K.G.Acharya & Co., Chartered Accountants

K.G.Acharya & Co., Chartered Accountants 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. K.G.Acharya & Co., Chartered Accountants

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

Accounting Standard 22 Accounting for Taxes on Income ISSUES & LATEST DEVLOPMENTS

K.G.Acharya & Co., Chartered Accountants 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)] K.G.Acharya & Co., Chartered Accountants

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

K.G.Acharya & Co., Chartered Accountants 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 K.G.Acharya & Co., Chartered Accountants

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

Financial Implication of Deferred Tax: (1) Effect of Deferred tax on Income Tax Effect on Current Ratio 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

K.G.Acharya & Co., Chartered Accountants (6) Affects Net Profit Ratio (PAT/Net Sales) (7) Affects EPS 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

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

Issues relating to DTA / DTL: (4) Accounting for Taxes on Income in Interim Financial Reports as per AS-25 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

Issues relating to DTA / DTL: 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 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 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

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K.G.Acharya & Co., Chartered Accountants 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

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