Ind AS-12: Income tax

Ind AS 12, “Income Taxes,” specifies the accounting treatment for income taxes. The standard requires the application of the balance sheet liability method to account for income taxes, which includes both current tax and deferred tax. Ind AS 12 aims to address the treatment of current and deferred tax consequences of the future recovery (or settlement) of the carrying amount of assets and liabilities that are recognized in an entity’s balance sheet.

Introduction

Income taxes represent a significant aspect of financial reporting due to their complexity and the effect they can have on the financial statements. Ind AS 12 introduces a comprehensive framework for accounting for income taxes, ensuring entities recognize the current and future tax implications of their business transactions. The standard’s objective is to provide a consistent and practical method for calculating the tax expense in the financial statements, contributing to the comparability and transparency of financial information across different jurisdictions.

Scope

Ind AS 12 applies to all entities and covers almost all forms of taxes that are based on taxable profits. The standard is applicable to the accounting for income taxes, including the determination of the amount of the expense (or benefit) relating to the current period and the recognition and measurement of deferred tax liabilities and assets. It does not apply to methods of accounting for government grants (covered by Ind AS 20) or investment tax credits.

Important Aspects

1. Current Tax:

This refers to the amount of income taxes payable (or recoverable) in respect of the taxable profit (or tax loss) for a period. Ind AS 12 requires an entity to recognize a liability to pay the current tax in the period in which the tax is due. Similarly, if the amount paid exceeds the amount due, the excess is recognized as an asset.

2. Deferred Tax:

Deferred tax is accounted for using the balance sheet liability method. Deferred tax liabilities are the amounts of income taxes payable in future periods in respect of taxable temporary differences. Deferred tax assets are the amounts of income taxes recoverable in future periods in respect of:

• Deductible temporary differences,
• The carryforward of unused tax losses, and
• The carryforward of unused tax credits.

3. Temporary Differences:

These are differences between the carrying amount of an asset or liability in the balance sheet and its tax base. Temporary differences may be either taxable (leading to deferred tax liabilities) or deductible (leading to deferred tax assets).

4. Recognition of Deferred Tax Assets:

Recognition of deferred tax assets is based on the likelihood of the availability of future taxable profits against which the deductible temporary differences, tax loss carryforwards, or tax credit carryforwards can be utilized.

5. Measurement:

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period when the liability is settled or the asset is realized, based on tax rates (and tax laws) that have been enacted or substantively enacted by the reporting date.

6. Presentation and Disclosure:

Ind AS 12 requires specific disclosures to enable users of financial statements to understand the relationship between the tax expense (or income) and the accounting profit, as well as the nature and amounts of deferred tax liabilities and assets.

Objective

The objective of this standard is to prescribe the accounting treatment for income taxes. The principal issue in accounting for income taxes is how to account for current and future tax consequences of:

• Future settlement of carrying amount of assets and liabilities that are recognised in the balance sheet of an organisation. If it is probable that the settlement of the carrying amount will result in a variance of tax amount which should then be recognised as deferred tax.
• Events and transactions that are recognised in the current period. The treatment for the tax related to the events will be the same as the events.

The principal issue in accounting for income taxes is how to account for the current and future tax consequences of:

• Transactions and other events of the current period that are recognised in an entity financial.
• The future recovery (settlement) of the carrying amount of assets (liabilities) that are recognised in an entity’s statement of financial position.

Tax expense or Income

• Deferred Tax liability is the amount of income tax payable in future periods with respect to the taxable temporary differences.
• Tax expense or Tax income is the aggregate amount included in the determination of profit or loss in respect of current tax and deferred tax. Current tax is the amount of income taxes payable/recoverable in respect of the current profit/ loss for a period.
• Deferred tax asset is the income tax amount recoverable in future periods in respect to the deductible temporary differences, carry forward of unused tax losses, and carry forward of unused tax credits.
• Tax Base of an asset or liability is the amount attributed to the asset or liability for tax purposes.
• Temporary differences are the differences between the carrying amount of an asset or liability in the balance sheet and its tax base.

Deferred Tax Assets and Liabilities shall not be discounted

The carrying amount of a deferred tax asset shall be reviewed at the end of each reporting period. An entity shall reduce the carrying amount of  a  deferred tax asset 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  deferred tax asset to be utilised. Any such reduction shall be reversed to the extent that it becomes probable that sufficient taxable profit will be available.

Allocation

This Standard requires an entity to account for the tax consequences of transactions and other events in the same way that it accounts for the transactions and other events themselves. Thus, for transactions and other events recognised in profit or loss, any related tax effects are also recognized in profit or loss. For transactions and other events recognised outside profit or loss (either in other comprehensive income or directly in equity), any related tax effects are also recognised outside profit or loss (either in other comprehensive income or directly in equity, respectively).

Similarly, the recognition of deferred tax assets and liabilities in a business combination affects the amount of goodwill arising in that business combination or the amount of the bargain purchase gain recognised.

Appendix A of Ind AS 12 addresses how an entity should account for the tax consequences of a change in its tax status or that of its shareholders. The Appendix prescribes that a change in the tax status of an entity or its shareholders does not give rise to increases or decreases in amounts recognised outside profit or loss. The current and deferred tax consequences of a change in tax status shall be included in profit or loss for the period, unless those consequences relate to transactions and events that result, in the same or a different period, in a direct credit or charge to the recognised amount of equity or in amounts recognised in other comprehensive income.

Those tax consequences that relate to changes in the recognised amount of equity, in the same or a different period (not included in profit or loss), shall be charged or credited directly to equity. Those tax consequences that relate to amounts recognised in other comprehensive income shall be recognised in other comprehensive income.

Presentation of Current and Deferred tax Assets and Liabilities

An entity shall offset current tax assets and liabilities only if it is legally entitled to and it intends to settle on a net basis or to realise assets and settle liabilities simultaneously. It can offset deferred tax assets and liabilities if:

• The deferred tax assets and liabilities relate to the income taxes levied by the same taxation authorities on same entities or on entities that intend to settle current tax assets and liabilities on a net basis or to realise assets and settle liabilities simultaneously.
• It has the legal right to offset current tax assets and liabilities.