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SUB REGIONAL CONFERENCE & 19 th ANNUAL CONFERENCE of HUBLI BRANCH

SUB REGIONAL CONFERENCE & 19 th ANNUAL CONFERENCE of HUBLI BRANCH. D eferred Taxation AS 22 and Latest Developments K.GURURAJ ACHARYA CHARTERED ACCOUNTANT TELEFAX: (080) 2336 1800 acharyaguru@yahoo.com. ICAI Statements. Standards (Mandatory). Guidance Notes (Recommendatory).

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SUB REGIONAL CONFERENCE & 19 th ANNUAL CONFERENCE of HUBLI BRANCH

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  1. SUB REGIONAL CONFERENCE & 19th ANNUAL CONFERENCE of HUBLI BRANCH Deferred Taxation AS 22 and Latest Developments K.GURURAJ ACHARYACHARTERED ACCOUNTANTTELEFAX: (080) 2336 1800 acharyaguru@yahoo.com

  2. 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

  3. Accounting Standards u/s.211(3c)(wef 31.10.1998) Accounting Standard means the standard of accounting: Recommended by ICAI and Prescribedby Government in Consultation with the NACAS constituted u/s 210A(1) of the Companies Act, 1956. K.G.Acharya & Co., Chartered Accountants

  4. 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

  5. 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 • Enterprises with > 40 Lacs but < 50 crores Turnover. • > 1 crore but < 10 crores borrowings • Holding & subsidiary cos of above. Level - II Level - III • Other than Level - I & Level - II cases w.e.f 17-Sep-2003 K.G.Acharya & Co., Chartered Accountants

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

  7. “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

  8. Timing differences -TD- Differences between TI and AI for a period that originate in one period and arecapable 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

  9. “Deferred Tax ” Taxable Income 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

  10. “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

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

  16. 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

  17. 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

  18. Recognition of Deferred Tax AssetConsideration of PRUDENCE is a must while recognizing DTA K.G.Acharya & Co., Chartered Accountants

  19. Re-Assessment v/s Review Re-Assessment (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

  20. 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

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

  22. 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

  23. 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

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

  25. 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

  26. 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

  27. 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

  28. 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

  29. 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

  30. (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

  31. 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

  32. 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

  33. 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 10Bof 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

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

  35. 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

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

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