24 October 2014
Dear Experts, First of all wish u a very happy diwali season... My query is regarding AS-22 I have recently joined a company...company has its manufacturing unit in uttrakhand, thus enjoying the benefit of Sec 80IB under income tax act. Therefore, profits are exempt, but company is paying tax due to MAT provision... Now since profit in books and income tax profit(due to mat) are same...does the company need to create DTL provision on timing difference of depretiation...auditor of company has made DTL provision..but i dont think company should make any provision.. Plz help Thanks in advance..
20 July 2024
Regarding your query about Deferred Tax Liability (DTL) under AS-22:
AS-22 (Accounting Standard 22) deals with accounting for taxes on income. Here’s how it applies to your situation:
1. **MAT Provision and Taxable Income:** - Your company is operating in Uttarakhand and availing the benefit of Section 80IB, which provides for exemption of profits from certain industrial undertakings. - Despite this exemption, the company is liable to pay Minimum Alternate Tax (MAT) under the Income Tax Act. MAT is calculated on the basis of book profits, adjusted for certain items including timing differences in depreciation. - MAT ensures that companies pay a minimum amount of tax even if they are availing exemptions under other provisions.
2. **Deferred Tax Liability (DTL) Provision:** - AS-22 requires companies to recognize deferred tax liabilities (DTLs) for all taxable temporary differences, unless the recognition of a DTL is prohibited by the standard. - Temporary differences arise when the carrying amount of an asset or liability in the financial statements differs from its tax base. In your case, one such temporary difference could be the timing difference in depreciation.
3. **Depreciation Timing Difference:** - Typically, depreciation is recognized differently for accounting purposes (as per Companies Act) compared to tax purposes (as per Income Tax Act). - If there is a timing difference in the depreciation expense between financial reporting and taxable income calculation (due to MAT), this creates a temporary difference. - AS-22 requires the company to recognize a DTL for such timing differences unless there is an exemption under the standard (e.g., if it is probable that the temporary difference will not reverse in the foreseeable future).
4. **Company’s Position:** - While your initial view might be that no DTL provision is necessary because there is no actual taxable income (due to exemption under Section 80IB), AS-22 focuses on timing differences rather than actual tax paid. - The auditor's provision of DTL suggests that there are timing differences that will result in taxable income in future periods when MAT credit may be utilized or the exemption ceases to apply.
5. **Conclusion:** - Based on AS-22, the company should recognize a DTL for timing differences in depreciation between financial reporting and tax purposes, even if the company is not currently paying tax due to exemptions or credits. - It’s advisable to discuss this with your auditor and tax advisor to ensure compliance with accounting standards and tax regulations.
If you have further specific details or updates on the company's tax situation, it would be beneficial to consult with your company's auditors or tax advisors for tailored advice.
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