Avail 20% discount on updated CA lectures for Dec 21 .Use Code RESULT20 !! Call : 088803-20003

ICICI

Share on Facebook

Share on Twitter

Share on LinkedIn

Share on Email

Share More


Meanings

  • Current Tax: Tax Payable in Current year as per income tax.
  • Deferred Tax: Temporary Savings/Temporary Additional payment of income tax which arises due to temporary differences between carrying value and tax base.
  • Carrying Values: Account ledger balance as per Books Of Accounts (as per AFRF).
  • Tax Base: Ledger Balance that would appear in Tax Trial Balance if we were to prepare one.
IND AS 12: Income Taxes

Need

Let's take an example, there are two entities engaged in manufacturing activities A ltd is a company registered in Maharashtra, while B ltd is Registered in Bihar.

Owing to the developing status of Bihar, the Indian Government has provided various tax incentives to entities registered in the state; one of the incentives is claiming 50% depreciation in the first year on capital goods purchased and installed in the state.

Particulars

A ltd

B Ltd

   
         

Investment

       

Machinery purchased and installed (A)

1000000

1000000

   
         

Profit and Loss Statement

       

Sales

1500000

1500000

   

- Prime Cost

850000

850000

   

Contribution

650000

650000

   

Fixed Cost (accounting Dep @ 20%)

200000

200000

   

PBT

450000

450000

   

Current tax (note 1)

120000

45000

   

PAT (B)

330000

405000

   

ROI % (A/B)

33%

40.5%

   
         
         
         

Note 1

       

Calculation of tax @ 30%

       

PBT as per BOA

450000

450000

   

+ Dep as per Companies act

200000

200000

Normal Dep 25%

Special rate for Bihar 50%

Total

650000

650000

   

- Dep as Per Income Tax law

250000

500000

   

Profit as per income tax

400000

150000

   

Tax on above @ 30%

120000

45000

   

From the above we can see the reported ROE of B Ltd is higher at 40.5% while that of A ltd is just 33% even though both the companies earned same level PBT Investors would prefer to invest in B ltd owing to its higher ROE; However in the later years B ltd will pay more taxes as compared to A ltd As there would be lower depreciation expenses to be claimed by it (as IT laws already allowed 50% deduction in 1st year itself)

One could say that the tax expense of B ltd were deferred to year 2 and so on

Hence to compare the performance of two entities and give investors the insight of true profits concept of deferred tax was introduce

 

Concept

Difference between carrying values in BOA and Tax Base could be of two types

A. Temporary Differences

Temporary differences are the difference between the two carrying values which reverse in course of time this would typically include depreciation/ amortisation expense & Revenue expenses (Mercantile VS Cash Basis)

These differences can be further analysed into two categories

a. Taxable Temporary Difference (TTD)

These differences are the ones which would result in additional tax payments in future, for eg claiming 100% depreciation in Cy will result in higher profits in later years which would mean higher tax expense in future

We multiply TTD with expected tax rates to get Deferred tax liability (DTL)

b. Deductible temporary Difference (DTD)

These differences are the ones which would result in deduction in tax payments in future, for eg provisions are generally not allowed in income tax so when we actually incur the expenses in future years we will be able to deduct the same from our future tax profits this would result in lower tax expenses in future

We multiply DTD with expected tax rates to get Deferred tax Asset (DTA)

B. Other Differences

These differences are straight away disallowed in income tax law and won't be allowed in future years hence these difference are not temporary in nature and hence no reversal will take place in future hence these are not considered in deferred tax calculations

 

Calculations

Now lets calculate the deferred tax of A ltd and B ltd

A Ltd Deferred tax working

Machinery

   

Balance as per BOA

   

Purchase

1000000

 

- Dep Cy

200000

800000

     

Tax Base

   

Purchase

1000000

 

- Dep as per IT

250000

750000

     

Difference (A) TTD

 

50000

     

DTL (A* Tax Rate)

 

15000

B Ltd Deferred tax working

Machinery

   

Balance as per BOA

   

Purchase

1000000

 

- Dep Cy

200000

800000

     

Tax Base

   

Purchase

1000000

 

- Dep as per IT

500000

500000

     

Difference (A) TTD

 

300000

     

DTL (A* Tax Rate)

 

90000

Revised Income statement

Particulars

A

B

PBT

450000

450000

     

- Tax Expense

   

Current Tax

120000

45000

Deferred Tax

15000

90000

     

PAT

315000

315000

From the above we can see the PAT for both A ltd and Bltd are same the revised ROI will be 315000/100000 = 31.5% for both the entities, the above statement gives us true profits on which investors can base their judgements

INDAS 12 Logic

Sr

BOA

TAX Base

Difference

DTA/DTL?

1

Expenses

 

10000

6000

4000

DTA

 

We have claimed rs 10000 exp but IT laws allowed only 6000 in CY and CF of 4000 in next year, it will result in payment of more tax in Cy but lower tax in next year, hence its a Deductible Temporary Difference

2

Expenses

 

6000

60000

-54000

DTL

 

We are charging expenses on pro-rata basis in accounts however IT law allowed us to claim full exp in current year, this will result in lower tax payments in current year however as no expense related to above will claimed next year our tax expense will increase in next year, hence its a Taxable Temporary Difference

3

Income

 

2000

10000

-8000

DTA

 

We are being assessed for more income in income tax in CT hence we will pay more tax in CY, however while we amortise the income in BOA in future years the same will not be taxed again in future years, hence its a Deductible Temporary Difference

4

Income

 

100000

20000

80000

DTL

 

We are being assessed for lower income in income tax in CY so we will pay less tax now, but in later years when the income is considered in tax laws it will increase or tax expense in next year, hence its a Taxable Temporary Difference

Asset/ Liability Bal

PPE

PPE

Provision

Advance Fees received

Asset

Asset

Liability

Liability

BOA

100000

80000

100000

5000

Tax Base

80000

100000

50000

10000

Diff

20000

-20000

50000

-5000

Effect

Higher Dep Exp claimed in IT which leads to Lower Current Tax Exp which would in turn lead to Higher Tax exp in future, hence create DTL

Less Dep Exp claimed in IT which leads to Higher Current Tax Exp which would in turn lead to Lower Tax Exp in future, hence create DTA

Less Provision Exp claimed in IT which leads to Higher Current Tax Exp which in turn would lead to Lower Tax Exp in future, hence create DTA

Higher Revenue Capitalised in IT which leads to Higher Current Tax Exp which in turn would lead to Lower Tax Exp in future, hence create DTA

TIPS

  • Always try to think from the viewpoint of income tax (take Tax Base as your basis)
  • Solve using asset and liability approach instead of income exp approach
    • Liability

BOA >Tax Base = DTA

  • Asset

BOA > Tax base= DTL

Advance

  • DTA should be recognized only when there are enough future Taxable Profits + Reversal of DTL + Tax planning opportunities/strategies
  • For creation of DTA/DTL we will use income tax rates which are enacted/ substantially enacted up to Balance sheet date
  • Recognition of tax expense,
    • On Items of P/L will go to PL
    • On items of OCI will go to OCI
    • On Items recognized directly in Reserve
  • Tax reconciliations
    • Absolute Terms

Profit as per AFRF (a)

XXX

Applicable Tax Rate (b)

X%

Tax Expense (a*b)

XX

+ Expense not Deducted (Tax Effect)

XX

Total Tax Exp (Current + Deferred)

XXX

% Terms

Applicable Tax Rates X%
(+) Expenses not Deducted X%*
Avg Tax Rates X%

*Tax on Exp

Total Revenue

"Loved reading this piece by Jerold Ferreira?
Join CAclubindia's network for Daily Articles, News Updates, Forum Threads, Judgments, Courses for CA/CS/CMA, Professional Courses and MUCH MORE!"




Tags :



Category Accounts, Other Articles by - Jerold Ferreira 



Comments


update