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In India, everyone who earns or gets an income is subject to income tax, whether he is a resident or a non-resident of India. The income earned could be salary, pension or could be an interest from a savings account. Even, winning receipt from contests like “Kaun Banega Crorepati” are subject to tax on the prize money. In this connection, the Ind AS 12 serves the purpose to understand income taxes including both domestic and foreign taxes, which are based on taxable profits. The standard also includes withholding taxes.
The basic objective of the standard is to explain the accounting treatment for income taxes. The principal challenge in accounting for income taxes is how to differentiate and account for current and future tax consequences of:
Important terms
Recognition
Current taxes for both current and prior periods shall, to the extent not paid, be recognized as a liability. If the prepaid amount in respect of current and prior periods exceeds the amount actually due for those periods, then the excess amount shall be recognized as an asset.
It is integral in the recognition of an asset or liability that the reporting entity expects to recover or settle the carrying value of such an asset or liability. If it is probable that recovery or settlement of that carrying value will make future tax payments higher or smaller than they would be if such recovery or settlement were subject to have no tax consequences, the entity is required to recognize a deferred tax liability or asset, with certain limited exceptions.
A deferred tax asset shall be recognized for the carry forward of unutilized tax losses and unutilized tax credits to the extent that it is expected that the future taxable profit will be available against which the unutilized tax losses and unutilized tax credits can be used. Taxes to the extent unpaid for current and prior periods will be recognized as a deferred tax liability. If the amount already paid for current and prior periods exceeds the actual amount due, then it will be recognized as an asset.
A deferred tax asset will be recognized for all the deductible temporary differences, provided it is expected that the taxable profit will be available for utilization of deductible temporary differences. However, Ind AS 12 forbids recognizing a deferred tax asset if that asset arises from the initial recognition of an asset or liability in a transaction that:
Deferred tax liability shall be recognized for all taxable temporary differences. However, Ind AS 12 forbids the recognizing deferred tax on taxable temporary differences that arise from:
A tax loss, that can be utilized to recover current tax of a previous period, is recognized as an asset in the period in which the tax loss has occurred.
Measurement of current and deferred tax assets/liabilities
Current tax assets or liabilities shall be measured at the amount expected to be recovered from or paid to the taxation authorities, using the tax rates and tax laws that have been enacted or subsequently enacted before the end of the reporting period.
Deferred tax assets or liability will be measured at the expected tax rates in the period in which the asset is realized or liability paid based on the tax laws that have been enacted or subsequently enacted at the end of the reporting period.
Review of deferred tax assets and liabilities
The carrying value of a deferred tax asset shall be reviewed regularly at the end of each reporting period. An entity shall decrease the carrying value of a deferred tax asset to the extent that it is no longer expected that adequate taxable profit would be available to allow the benefit of part or all of that deferred tax asset to be utilized. Any such fall should be reversed to the extent that it is expected that adequate taxable profit will be available.
Presentation of current and deferred tax assets and liabilities
An entity shall offset current tax assets and liabilities only if it is legally entitled to and it intends to settle on a net basis or to realize assets and settle liabilities simultaneously.
Disclosure of current and deferred tax assets and liabilities
All the major components of tax expense or income shall be disclosed individually.
Allocation
According to the standard, an entity is required to account for tax consequences the same way it accounts for the transactions and other events. Thus, if any transactions and other events are recognized in the statement of profit and loss, then the related tax consequences should also be recognized in the statement of profit and loss.
If the transactions and events are recognized outside the statement of profit and loss that is in other comprehensive income or directly in equity, then the tax consequence of those transactions and events will also be recognized outside the statement of profit and loss that is in other comprehensive income or directly in equity.
At AJSH, we assist our clients in complying with the direct tax including filing of tax returns, tax assessments, secretarial compliances, bookkeeping and tax audits. If you have any questions or would like to know more about direct taxation. If you have any questions or want to know more about provision and applicability of income taxes, kindly contact us.
