Current Tax & Deferred Tax – Ind AS 12

Current Tax

  • Current tax, to the extent unpaid, should be recognised as a liability. If the amount already paid exceeds the amount due to be paid, the excess shall be recognised as an asset.
  • In some jurisdictions, tax losses can be carried back to recover taxes paid in previous periods. The benefit relating to a tax loss that can be carried back to recover current tax of a previous period shall be recognised as an asset.
  • An entity recognises the benefit as an asset in the period in which the tax loss occurs because it is probable that the benefit will flow to the entity and the benefit can be reliably measured.
  • Current tax liabilities (assets) for the current and prior periods shall be measured at the amount expected to be paid to (recovered from) the taxation authorities, using the tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period.

Taxable Temporary differences

Taxable temporary differences (Deferred tax liability)

Concept for recognising deferred tax liability on the basis of balance sheet approach

  • It is inherent in the recognition of an asset that its carrying amount will be recovered in the form of economic benefits that flow to the entity in future periods.
  • When the carrying amount of the asset exceeds its tax base, the amount of taxable economic benefits will exceed the amount that will be allowed as a deduction for tax purposes.
  • This difference is a taxable temporary difference and the obligation to pay the resulting income taxes in future periods is a deferred tax liability. As the entity recovers the carrying amount of the asset, the taxable temporary difference will reverse and the entity will have taxable profit.
  • This makes it probable that economic benefits will flow from the entity in the form of tax payments.

Recognition. Of deferred tax liabilities

  • Therefore, Ind AS 12 requires the recognition of all deferred tax liabilities, except to the extent that the deferred tax liability arises from:
  • the initial recognition of goodwill; or
  • the 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 accounting profit nor taxable profit (tax loss)
  • In simple words, where the carrying value of assets is more as per books of accounts or carrying value of liability is less as per books of accounts when compared to tax base, it results in taxable temporary differences.

Example

  • An asset which cost Rs. 150 has a carrying amount of Rs. 100. Cumulative depreciation for tax purposes is Rs. 90 and the tax rate is 25%. The tax base of the asset is Rs. 60 (cost of Rs. 150 less cumulative tax depreciation of Rs. 90). To recover the carrying amount of Rs. 100, the entity must earn taxable income of Rs. 100, but will only be able to deduct tax depreciation of Rs. 60.
  • Consequently, the entity will pay income taxes of Rs.10 (Rs. 40 at 25%) when it recovers the carrying amount of the asset. The difference between the carrying amount of Rs. 100 and the tax base of Rs. 60 is a taxable temporary difference of Rs. 40.
  • Therefore, the entity ecognizes a deferred tax liability of Rs. 10 (Rs. 40 at 25%) representing the income taxes that it will pay when it recovers the carrying amount of the asset.

Timing difference

  • The items that were classified as ‘timing difference’ under the AS 22 continues under Ind AS 12 as ‘temporary difference’. Examples –
  1. interest revenue is included in accounting profit on a time proportion basis but may, in some jurisdictions, be included in taxable profit when cash is collected. The tax base of any receivable recognised in the balance sheet with respect to such revenues is nil because the revenues do not affect taxable profit until cash is collected;
  • depreciation used in determining taxable profit (tax loss) may differ from that used in determining accounting profit. The temporary difference is the difference between the carrying amount of the asset and its tax base which is the original cost of the asset less all deductions in respect of that asset permitted under taxation laws in determining taxable profit of the current and prior periods. A taxable temporary difference arises, and results in a deferred tax liability, when tax depreciation is accelerated (if tax depreciation is less rapid than accounting depreciation, a deductible temporary difference arises, and results in a deferred tax asset);
  • development costs may be capitalised and amortised over future periods in determining accounting profit but deducted in determining taxable profit in the period in which they are incurred. Such development costs have a tax base of nil as they have already been deducted from taxable profit. The temporary difference is the difference between the carrying amount of the development costs and their tax base of nil.

Deductible temporary differences (Deferred tax assets)

Concept for recognising deferred tax asset on the basis of balance sheet approach

  • It is inherent in the recognition of a liability that the carrying amount will be settled in future periods through an outflow from the entity of resources embodying economic benefits.
  • When resources flow from the entity, part or all of their amounts may be deductible in determining taxable profit of a period later than the period in which the liability is recognised. In such cases, a temporary difference exists between the carrying amount of the liability and its tax base.
  • Accordingly, a deferred tax asset arises in respect of the income taxes that will be recoverable in the future periods when that part of the liability is allowed as a deduction in determining taxable profit.
  • Similarly, if the carrying amount of an asset is less than its tax base, the difference gives rise to a deferred tax asset in respect of the income taxes that will be recoverable in future periods.
  • Therefore, Ind AS 12 requires the recognition of all deferred tax assets to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilised, unless the deferred tax asset arises from the initial recognition of an asset or liability in a transaction that:
  • is not a business combination; and
  • at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss).
  • In simple words, where the carrying value of assets is less as per books of accounts or carrying value of liability is more as per books of accounts when compared to tax base, it results in deductible temporary differences.

Example

  • An entity recognises a liability of Rs. 100 for gratuity and leave encashment expenses by creating a provision for gratuity and leave encashment. For tax purposes, any amount with regard to gratuity and leave encashment will not be deductible until the entity pays the same. The tax rate is 25%.
  • The tax base of the liability is nil (carrying amount of Rs. 100, less the amount that will be deductible for tax purposes in respect of that liability in future periods).
  • In settling the liability for its carrying amount, the entity will reduce its future taxable profit by an amount of Rs. 100 and, consequently, reduce its future tax payments by Rs. 25 (Rs. 100 at 25%).
  • The difference between the carrying amount of Rs. 100 and the tax base of nil is a deductible temporary difference of Rs. 100. Therefore, the entity recognises a deferred tax asset of Rs. 25 (Rs. 100 at 25%), provided that it is probable that the entity will earn sufficient taxable profit in future periods to benefit from a reduction in tax payments.

Examples of deductible temporary differences that result in deferred tax assets:

  • retirement benefit costs may be deducted in determining accounting profit as service is provided by the employee but deducted in determining taxable profit either when contributions are paid to a fund by the entity or when retirement benefits are paid by the entity. A temporary difference exists between the carrying amount of the liability and its tax base; the tax base of the liability is usually nil. Such a deductible temporary difference results in a deferred tax asset as economic benefits will flow to the entity in the form of a deduction from taxable profits when contributions or retirement benefits are paid.
  • preliminary expenses are recognised as an expense in determining accounting profit in the period in which they are incurred but may not be permitted as a deduction in determining taxable profit (tax loss) until a later period(s). The difference between the tax base of the preliminary expenses, being the amount permitted as a deduction in future periods under taxation laws, and the carrying amount of nil is a deductible temporary difference that results in a deferred tax asset.
  • Generally, an entity recognises the identifiable assets acquired and liabilities assumed in a business combination at their fair values at the acquisition date. When a liability assumed is recognised at the acquisition date but the related costs are not deducted in determining taxable profits until a later period, a deductible temporary difference arises which results in a deferred tax asset. A deferred tax asset also arises when the fair value of an identifiable asset acquired is less than its tax base. In both cases, the resulting deferred tax asset affects goodwill.
  • certain assets may be carried at fair value, or may be revalued, without an equivalent adjustment being made for tax purposes. A deductible temporary difference arises if the tax base of the asset exceeds its carrying amount.
  • Deferred tax assets should be recognized only when it is probable that taxable profits will be available against which the deductible temporary differences can be utilised. Deferred tax asset is recognised to the extent that:
  • it is probable that the entity will have sufficient taxable profit relating to the same taxation authority and the same taxable entity in the same period as the reversal of the deductible temporary difference (or in the periods into which a tax loss arising from the deferred tax asset can be carried back or forward). In evaluating whether it will have sufficient taxable profit in future periods, an entity ignores taxable amounts arising from deductible temporary differences that are expected to originate in future periods, because the deferred tax asset arising from these deductible temporary differences will itself require future taxable profit in order to be utilised; or
  • tax planning opportunities are available to the entity that will create taxable profit in appropriate periods.

Tax planning

  • Tax planning opportunities are actions that the entity would take in order to create or increase taxable income in a particular period before the expiry of a tax loss or tax credit carryforward. For example, in some jurisdictions, taxable profit may be created or increased by:
    • electing to have interest income taxed on either a received or receivable basis;
    • deferring the claim for certain deductions from taxable profit
    • selling, and perhaps leasing back, assets that have appreciated but for which the tax base has not been adjusted to reflect such appreciation; and
    • selling an asset that generates non-taxable income (such as, in some jurisdictions, a government bond) in order to purchase another investment that generates taxable income.

Unused tax losses and unused tax credits

  • A deferred tax asset shall be utilized for the carryforward of unused tax losses and unused tax credits to the extent that it is probable that future taxable profit will be available against which the unused tax losses and unused tax credits can be utilized.
  • When an entity has a history of recent losses, the entity recognises a deferred tax asset arising from unused tax losses or tax credits only to the extent that the entity has sufficient taxable temporary differences or there is convincing other evidence that sufficient taxable profit will be available against which the unused tax losses or unused tax credits can be utilised by the entity.

Reassessment of unrecognised deferred tax assets

  • At the end of each reporting period, an entity reassesses unrecognised deferred tax assets. The entity recognises a previously unrecognised deferred tax asset to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered.
  • For example, an improvement in trading conditions may make it more probable that the entity will be able to generate sufficient taxable profit in the future for the deferred tax asset to meet the recognition criteria.

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