Introduction to Ind AS 12

Ind AS 12 prescribes accounting treatment for income taxes. The principal issue in accounting for income taxes is how to account for the current and future tax consequences of future recovery of the carrying amount of assets (liabilities) that are recognized in an entity’s balance sheet and transactions and other events of the current period that are recognized in an entity’s financial statements.

Notable changes were made in Ind AS 12 in comparison to AS 22. Considering the time constraint and for ease of understanding it is important to address only those issues which are imperative for the one’s understanding. To summarize the same following are the important points are to be taken care of while applying Ind AS 12.

Scope of Ind AS 12
For the purpose of this standard, income taxes include:

• All foreign and domestic taxes which are based on taxable profits
• Withholding taxes, payable by the components on distributions to the reporting entity.

And income taxes exclude:

• Other taxes (e.g. VAT, Business Tax) that are levied on another basis (e.g. on gross revenue)
• Methods of Accounting for Government grants

Brief
Concept of current tax, deferred tax assets / liabilities is same as in AS 22 and new concept of taxable and deductible temporary differences is introduced which is an elaborative version of timing difference if we compare it with AS 22. Further, entirely new concept which is introduced in Ind AS 12 is Tax Base.

Concept of tax base under Ind AS 12
The tax base of an asset or liability is the amount allocated to that asset or liability for tax purposes. The tax base of an asset is the amount that will be deductible for tax purposes opposed to any taxable economic benefits that will flow to an entity when it recovers the carrying amount of the asset. If those economic benefits will not be taxable, the tax base of the asset is equal to its carrying amount.
For an instance,
(a) Current liabilities include accrued expenses having carrying amount of INR 100. The associated expense has already been deducted for tax purposes. The tax base of the accrued costs is INR 100.
(b) Current liabilities include accrued expenses having carrying amount of INR 100. The associated expense will be deducted for tax purposes on a cash basis. The tax base of the accrued costs is nil.

Recognition
Recognition of current tax liabilities and current tax assets under Ind AS 12 will remain same as in AS 22.

Recognition of Deferred Tax Liabilities (DTL) and Deferred Tax Assets (DTA)
Taxable Temporary Differences: A deferred tax liability shall be recognized for all taxable temporary differences, but to the extent that the deferred tax liability arises:

1. At the time of initial recognition of goodwill; or
2. At the time of initial recognition of an asset or liability in a transaction which:

• is not a business combination; and
• at the time of the transaction, affects neither book profit nor taxable profit (tax loss).

However, for taxable temporary differences related with investments in subsidiaries, branches and associates, and interests in joint ventures, a deferred tax liability shall be recognized.

Approach for creating deferred tax
Ind AS 12 is based on balance sheet approach. It requires recognition of tax consequences of differences between the carrying amounts of assets and liabilities and their tax base whereas existing AS 22 is based on income statement approach. It requires recognition of tax consequences of differences between taxable income and accounting income.

No Discounting
DTA and DTL shall not be discounted.

Review of Deferred Tax Asset
The carrying amount of a DTA shall be reviewed at the end of each reporting period. An entity shall reduce the carrying amount of a DTA to the extent that it is no longer probable that sufficient taxable profit will be available to allow the benefit of part or all of that DTA to be utilized. Any such decrease shall be reversed to the extent that it becomes probable that sufficient taxable profit will be available.

Important Disclosures
Below mentioned are some essential disclosures in Ind AS 12:

1. Major component of tax expenses (income) that are required separate disclosure such as:

• Current tax expense
• Prior period adjustment
• Deferred expense/income

2. Total of current and deferred tax relating to items that are charged or credited directly to equity.
3. Income tax relating to each component of Other Comprehensive Income (OCI).
4. Reconciliation

• a numerical reconciliation between tax expense (income) and the product of book profit multiplied by the applicable tax rate, disclosing also the basis on which the applicable tax rate is computed; or
• a numerical reconciliation between the average effective tax rate and the applicable tax rate, disclosing also the basis on which the applicable tax rate is calculated.

5. A statement for explanation of changes in the applicable tax rate compared to the previous accounting period.
6. Amount and expiry date, if any of deductible temporary differences, unused losses and credits for which no DTA recognized.
7. Aggregate amount of temporary differences associated with investments in subsidiaries, branches and associates and interests in joint ventures, for which DTL have not been recognized.
8. Amount of DTA recognized and nature of evidence supporting its recognition, when:

• the utilization of the DTA is dependent on future taxable profits in excess of the profits arising from the reversal of existing taxable temporary differences; and
• the entity has incurred a loss in either the current or preceding period (history of losses)

9. In respect of each class of temporary difference, and in respect of each type of unused tax losses and unused tax credits:

• the amount of the DTA and DTL recognized in the balance sheet for each period presented,
• the amount of the deferred tax income or expense recognized in profit or loss, if this is not apparent from the changes in the amounts recognized in the balance sheet.

10. Amount of income tax consequences of dividends to shareholders of the entity that were proposed or declared before the financial statements were approved for issue, but are not recognized as a liability in the financial statements.
    

Guidance on certain issues can be obtained from AS 22:
Existing AS 22 specifically provides guidance in relation with the tax rates to be applied in measuring deferred tax assets / liabilities in a situation where a company pays tax under section 115JB as per the Income Tax Act 1961. Ind AS 12 doesn’t specifically deal with this aspect.

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