Current Tax, Concepts, Meaning, Objectives, Scope, Recognition, Measurement, Accounting of Current Tax Effects, Importance and Limitations
by Current Tax is the amount of income tax payable or recoverable in respect of the taxable profit or tax loss for a particular accounting period. It is calculated according to the applicable income tax laws and tax rates in force at the reporting date.
Current tax represents the entity’s present tax obligation to the government based on the taxable income earned during the year. If the tax payable exceeds the tax already paid, the difference is recognised as a current tax liability. If the tax paid exceeds the tax payable, the excess amount is recognised as a current tax asset.
Current tax is recognised in the Statement of Profit and Loss, except when it relates to items recognised in Other Comprehensive Income (OCI) or equity, in which case the related tax is also recognised in the same place. Proper accounting of current tax ensures compliance with tax laws and presents a true and fair view of the entity’s tax obligations in the financial statements.
Objectives of Ind AS 12 – Income Taxes
- To Prescribe Accounting Treatment for Income Taxes
The primary objective of Ind AS 12 is to prescribe the accounting treatment for income taxes. It provides principles for recognising, measuring, presenting, and disclosing current tax and deferred tax in financial statements. The standard ensures that the tax consequences of transactions and events are recorded in the same accounting period in which those transactions occur. This approach improves the accuracy of financial reporting and ensures consistency among entities. By establishing uniform accounting rules for income taxes, Ind AS 12 enhances the reliability, comparability, and transparency of financial statements prepared under Indian Accounting Standards.
- To Ensure Proper Recognition of Current Tax
Ind AS 12 aims to ensure that current tax is recognised correctly in the financial statements. Current tax represents the amount of income tax payable or recoverable based on the taxable profit or tax loss for the reporting period. The standard requires entities to recognise current tax liabilities for unpaid taxes and current tax assets for recoverable amounts. Proper recognition ensures that the financial statements reflect the entity’s present tax obligations and tax benefits. This objective improves the accuracy of reported tax expenses and promotes compliance with applicable income tax laws and accounting principles.
- To Recognise Future Tax Consequences
A major objective of Ind AS 12 is to recognise the future tax consequences of transactions and events that have already been recognised in financial statements. Temporary differences between the carrying amount of assets and liabilities and their tax bases create future tax obligations or tax benefits. Ind AS 12 requires these future tax effects to be recognised as deferred tax assets or deferred tax liabilities. This objective ensures that financial statements reflect both current and future tax implications, providing users with a complete and realistic view of an entity’s financial position and future obligations.
- To Provide Guidelines for Deferred Tax Accounting
Ind AS 12 provides comprehensive guidance for recognising and measuring deferred tax assets and deferred tax liabilities. Deferred tax arises because accounting standards and tax laws often recognise income and expenses at different times. The standard establishes principles for identifying temporary differences, calculating deferred tax amounts, and recognising them appropriately. This objective ensures consistency in deferred tax accounting across different entities. Proper accounting for deferred taxes improves the matching of tax expenses with accounting income and provides a more accurate representation of the financial effects of taxation.
- To Prevent Misstatement of Assets and Liabilities
Another important objective of Ind AS 12 is to prevent the overstatement or understatement of assets and liabilities resulting from tax effects. Without recognising deferred taxes, financial statements may fail to reflect future tax obligations or future tax benefits arising from temporary differences. The standard ensures that deferred tax liabilities and deferred tax assets are recognised whenever appropriate. This improves the accuracy of the balance sheet and helps present a true and fair view of the financial position of an entity. It also increases confidence among users of financial statements.
- To Improve Transparency in Financial Reporting
Ind AS 12 aims to improve transparency by requiring entities to disclose significant information relating to current tax and deferred tax. Tax-related disclosures include the components of tax expense, deferred tax balances, and the reasons for differences between accounting profit and taxable profit. These disclosures enable investors, creditors, regulators, and other stakeholders to understand the tax impact on an entity’s financial performance. Transparent reporting enhances accountability and helps users evaluate how taxation affects profitability, cash flows, and financial position. It also promotes confidence in published financial statements.
- To Achieve Comparability of Financial Statements
One of the objectives of Ind AS 12 is to establish uniform accounting principles for income taxes so that financial statements prepared by different entities become comparable. By applying common rules for recognising current tax and deferred tax, organisations report tax-related information in a consistent manner. Comparability helps investors, analysts, and regulators evaluate the financial performance and tax position of different companies more effectively. Uniform application of the standard reduces variations in accounting practices and enhances the quality, consistency, and usefulness of financial reporting across industries and business sectors.
- To Support Better Decision-Making
The ultimate objective of Ind AS 12 is to provide reliable and relevant information about income taxes that supports informed decision-making by stakeholders. Accurate recognition of current and deferred taxes enables investors, creditors, management, and regulators to assess an entity’s profitability, financial position, future tax obligations, and expected tax benefits. The standard ensures that tax expenses are matched with related accounting income, improving the quality of reported financial information. Better tax reporting reduces uncertainty, enhances confidence in financial statements, and enables stakeholders to make sound economic and investment decisions.
Scope of Ind AS 12 – Income Taxes
- General Scope of Ind AS 12
Ind AS 12 applies to the accounting treatment of income taxes imposed on the taxable profits of an entity. It establishes principles for recognising, measuring, presenting, and disclosing current tax and deferred tax in financial statements. The standard applies to all entities preparing financial statements under Indian Accounting Standards, irrespective of their size or industry. It covers both domestic and foreign income taxes that are based on taxable profits. The objective is to ensure that tax consequences of transactions and events are recognised consistently and reported accurately, thereby improving the reliability and comparability of financial statements across entities.
- Scope Related to Current Tax
Ind AS 12 covers the recognition and measurement of current tax arising from the taxable profit or tax loss of the reporting period. Current tax represents the amount of income tax payable or recoverable according to applicable tax laws. The standard requires entities to recognise current tax liabilities for unpaid taxes and current tax assets for recoverable taxes. It also provides guidance on presenting current tax in the financial statements. Proper application ensures that the tax obligations relating to the current accounting period are accurately reflected, enabling users to understand the entity’s present tax position and compliance with tax regulations.
- Scope Related to Deferred Tax
The standard applies to deferred tax arising from temporary differences between the carrying amount of assets and liabilities and their tax bases. These differences create future taxable or deductible amounts, resulting in deferred tax liabilities or deferred tax assets. Ind AS 12 provides detailed guidance on recognising, measuring, and presenting deferred taxes. By accounting for future tax consequences, the standard ensures that financial statements reflect not only current tax obligations but also future tax effects. This approach improves the accuracy of financial reporting and provides users with a complete understanding of future tax commitments.
- Scope Related to Temporary Differences
Ind AS 12 specifically covers temporary differences between the carrying amount of assets and liabilities in financial statements and their corresponding tax bases. Temporary differences may be taxable or deductible depending on their future tax consequences. Taxable temporary differences generally result in deferred tax liabilities, while deductible temporary differences may create deferred tax assets. The standard requires entities to identify and account for these differences properly. This ensures that future tax effects are recognised in the same period as the related transactions, thereby improving the matching of income, expenses, and tax effects.
- Scope Related to Deferred Tax Assets
Ind AS 12 applies to deferred tax assets arising from deductible temporary differences, unused tax losses, and unused tax credits. However, deferred tax assets are recognised only when it is probable that sufficient future taxable profits will be available against which these tax benefits can be utilised. The standard provides guidance for assessing recoverability and measuring deferred tax assets accurately. This scope prevents the overstatement of assets while ensuring that genuine future tax benefits are recognised. It promotes prudent accounting and enhances the reliability of financial statements by recognising only realistic tax benefits.
- Scope Related to Deferred Tax Liabilities
The standard also covers deferred tax liabilities arising from taxable temporary differences. These liabilities represent future income taxes payable because of differences between accounting values and tax values of assets and liabilities. Ind AS 12 generally requires recognition of deferred tax liabilities except in certain specified circumstances. Recognition ensures that future tax obligations are reflected in financial statements before they become payable. This scope improves the completeness of financial reporting and prevents understatement of liabilities. It also enables stakeholders to understand the future tax burden resulting from existing transactions and events.
- Scope Related to Business Combinations and Other Transactions
Ind AS 12 applies to tax consequences arising from business combinations and other transactions recognised in financial statements. During a business combination, differences between the fair value and tax base of acquired assets and liabilities may create deferred tax assets or liabilities. The standard also applies to transactions recognised in Other Comprehensive Income (OCI) or directly in equity. In such cases, the related tax effects are recognised in the same place as the underlying transaction. This ensures consistency in accounting treatment and accurate presentation of tax effects throughout the financial statements.
- Exclusions from the Scope of Ind AS 12
Although Ind AS 12 has a wide scope, it does not apply to taxes that are not based on taxable income. Indirect taxes such as Goods and Services Tax (GST), customs duties, excise duties, value-added taxes, and similar levies are outside the scope of the standard. These taxes are accounted for under other applicable accounting standards and tax regulations. By limiting its application to income taxes, Ind AS 12 maintains a clear focus on current and deferred tax accounting. This distinction avoids confusion and ensures consistent treatment of income tax-related transactions in financial reporting.
Recognition of Current Tax under Ind AS 12
Recognition of current tax refers to recording the amount of income tax payable or recoverable for the current and previous reporting periods in the financial statements. Under Ind AS 12, current tax is recognised based on the taxable profit or tax loss determined according to applicable income tax laws. The objective is to ensure that tax obligations and tax benefits relating to the reporting period are properly reflected. Recognition of current tax enables financial statements to present the entity’s actual tax position and ensures that tax expenses are matched with the related accounting period.
- Recognition of Current Tax Liability
A current tax liability is recognised when the income tax payable for the current or previous accounting period has not yet been paid. The liability represents the amount owed to the tax authorities based on taxable income. It is recognised in the balance sheet until the tax obligation is settled. Proper recognition ensures that outstanding tax liabilities are reported accurately, helping users understand the entity’s present financial obligations. This treatment also promotes compliance with tax laws and improves the reliability of financial statements.
- Recognition of Current Tax Asset
A current tax asset is recognised when the amount of tax already paid exceeds the amount of tax payable. It may also arise when an entity is entitled to a refund due to excess tax payments or advance taxes. The recoverable amount is recognised as an asset in the balance sheet until it is received from the tax authorities. Recognition of current tax assets ensures that financial statements reflect future economic benefits arising from recoverable taxes and provide a true and fair view of the entity’s financial position.
- Recognition Based on Taxable Profit
Current tax is recognised based on taxable profit rather than accounting profit. Taxable profit is determined according to income tax laws after adjusting accounting profit for allowable deductions, exempt income, disallowed expenses, and other tax-related adjustments. The tax liability or asset calculated from taxable profit is recognised in the financial statements. This approach ensures compliance with tax regulations while maintaining consistency in accounting treatment. Proper recognition based on taxable profit provides accurate information about the entity’s current tax obligations.
- Recognition in the Statement of Profit and Loss
Current tax is generally recognised as part of the tax expense or tax income in the Statement of Profit and Loss. The recognised amount represents the income tax relating to the current reporting period. Recording current tax in the profit and loss statement ensures that tax expenses are matched with the income earned during the same period. This treatment improves the accuracy of reported profits and provides users with a clear understanding of the effect of taxation on the entity’s financial performance.
- Recognition of Tax Related to Other Comprehensive Income
When a transaction or event is recognised in Other Comprehensive Income (OCI), the related current tax is also recognised in OCI rather than in the Statement of Profit and Loss. This ensures consistency between the accounting treatment of the transaction and its tax consequences. Examples include gains or losses on certain financial assets and revaluation adjustments recognised in OCI. Proper recognition maintains the integrity of financial reporting by ensuring that tax effects are presented in the same section as the related transaction.
- Recognition of Tax Related to Equity
If a transaction is recognised directly in equity, the related current tax is also recognised directly in equity. Examples include certain share-based transactions and adjustments arising from changes in accounting policies. This accounting treatment ensures consistency and avoids recognising the related tax effects in profit and loss. Ind AS 12 requires that the tax consequences follow the accounting treatment of the underlying transaction. Proper recognition improves the presentation of equity and enhances the reliability of financial statements.
Measurement of Current Tax under Ind AS 12
Measurement of current tax refers to determining the amount of income tax payable or recoverable for the current and previous reporting periods. Under Ind AS 12, current tax is measured based on the taxable profit or tax loss calculated according to the applicable income tax laws. The purpose of measurement is to ensure that the tax amount recognised in the financial statements accurately reflects the entity’s legal tax obligation or recoverable tax benefit. Proper measurement improves the reliability, consistency, and transparency of financial reporting and supports compliance with statutory tax requirements.
- Measurement Based on Taxable Profit
Ind AS 12 requires current tax to be measured using taxable profit rather than accounting profit. Taxable profit is determined after making adjustments required under tax laws, such as adding back disallowed expenses and deducting exempt income. The applicable tax rate is then applied to taxable profit to calculate the current tax amount. Measuring current tax on the basis of taxable profit ensures compliance with tax legislation and provides an accurate representation of the entity’s current tax obligation. It also helps avoid errors in reporting income tax expenses.
- Use of Enacted or Substantively Enacted Tax Rates
Current tax is measured using tax rates and tax laws that have been enacted or substantively enacted by the end of the reporting period. If tax laws or tax rates change after the reporting date but before approval of the financial statements, those changes are not considered unless they were substantively enacted before the reporting date. This requirement ensures consistency and reliability in tax measurement. Applying the correct tax rates enables entities to calculate current tax accurately and present financial statements that comply with the requirements of Ind AS 12.
- Measurement of Current Tax Liability
A current tax liability is measured as the amount of income tax expected to be paid to the tax authorities based on taxable income for the current or previous periods. The liability reflects the unpaid portion of income tax calculated under applicable tax laws. If taxes have already been paid through advance tax or tax deducted at source, these payments are adjusted against the liability. Proper measurement ensures that only the outstanding tax obligation is presented in the balance sheet, providing an accurate view of the entity’s financial commitments.
- Measurement of Current Tax Asset
A current tax asset is measured as the amount of income tax expected to be recovered from the tax authorities. It arises when taxes already paid exceed the actual tax payable or when tax refunds are available under the law. The recoverable amount is determined according to applicable tax regulations and recognised as a current asset. Accurate measurement ensures that financial statements reflect only genuine recoverable tax benefits. This treatment prevents overstatement of assets and improves the reliability of financial information presented to stakeholders.
- Adjustment for Advance Tax and Tax Deducted at Source
While measuring current tax, entities must consider advance tax payments and tax deducted at source (TDS). These amounts are adjusted against the total current tax liability to determine the balance payable or refundable. If advance tax and TDS exceed the tax liability, the excess amount is recognised as a current tax asset. If they are lower than the tax liability, the remaining amount is recognised as a current tax liability. This adjustment ensures accurate measurement of the final tax position at the reporting date.
- Measurement When Tax Laws Change
If changes in tax rates or tax laws are enacted or substantively enacted before the end of the reporting period, current tax must be measured using the revised tax rates. This ensures that the tax amount reflects the legal requirements applicable at the reporting date. However, changes announced after the reporting period without substantive enactment are not considered for measurement. Applying updated tax laws where required ensures compliance with Ind AS 12 and improves the accuracy of reported current tax amounts in financial statements.
Accounting of Current Tax Effects under Ind AS 12
Accounting for current tax effects refers to the recognition, measurement, presentation, and disclosure of income tax payable or recoverable for the current and previous reporting periods. Under Ind AS 12, current tax is calculated on taxable profit according to applicable tax laws. The accounting treatment ensures that tax expenses and tax obligations are recognised in the same accounting period as the related income. This approach provides a true and fair view of an entity’s financial position and performance while ensuring compliance with income tax regulations and improving the reliability of financial statements.
- Recognition of Current Tax Expense
Current tax expense is recognised in the Statement of Profit and Loss for the reporting period based on the taxable profit earned during the year. The amount recognised represents the income tax payable after applying the applicable tax laws and tax rates. Recognition of current tax expense ensures that taxation is matched with the income generated during the same accounting period. This treatment improves the accuracy of reported profits and enables users of financial statements to understand the impact of income taxes on the entity’s financial performance.
- Recognition of Current Tax Liability
A current tax liability is recognised when the income tax payable for the current or previous reporting periods remains unpaid at the reporting date. The liability represents the amount due to the tax authorities after considering advance tax payments, tax deducted at source (TDS), and other adjustments. It is presented as a current liability in the balance sheet until payment is made. Proper recognition of current tax liabilities ensures that financial statements accurately reflect the entity’s outstanding tax obligations and comply with the requirements of Ind AS 12.
- Recognition of Current Tax Asset
A current tax asset is recognised when the amount of tax already paid exceeds the tax liability or when the entity is entitled to receive a tax refund. Excess advance tax, TDS, or other recoverable tax amounts create a current tax asset. The asset is recognised in the balance sheet until the amount is recovered from the tax authorities. Recognition of current tax assets ensures that recoverable tax benefits are properly reflected in financial statements and prevents understatement of the entity’s financial resources.
- Current Tax Related to Other Comprehensive Income
When a transaction is recognised in Other Comprehensive Income (OCI), the related current tax effect must also be recognised in OCI instead of the Statement of Profit and Loss. Examples include gains or losses arising from the revaluation of certain financial assets or actuarial gains and losses recognised in OCI. This accounting treatment maintains consistency by recognising both the transaction and its related tax effect in the same component of the financial statements, thereby improving clarity and transparency.
- Current Tax Related to Equity
If a transaction or event is recognised directly in equity, the related current tax effect is also recognised directly in equity. Examples include certain share issue expenses and corrections of prior-period errors recognised through retained earnings. Ind AS 12 requires that tax effects follow the accounting treatment of the underlying transaction. This approach ensures consistency in financial reporting and avoids incorrect recognition of tax effects in the Statement of Profit and Loss when the related transaction has not been recognised there.
- Presentation and Disclosure of Current Tax Effects
Current tax effects are presented separately in the financial statements to provide clear information about tax expenses, tax assets, and tax liabilities. Current tax expense is generally presented in the Statement of Profit and Loss, while current tax assets and liabilities are presented in the balance sheet. Ind AS 12 also requires disclosure of significant components of current tax expense and reconciliation of tax expense where applicable. Proper presentation and disclosure improve transparency, comparability, and users’ understanding of the entity’s tax position.
Importance of Ind AS 12 – Income Taxes
- Ensures Proper Accounting for Income Taxes
Ind AS 12 plays an important role in establishing uniform principles for accounting for income taxes. It provides clear guidance for recognising, measuring, presenting, and disclosing current tax and deferred tax in financial statements. By following these principles, entities ensure that tax-related transactions are recorded accurately and consistently. Proper accounting prevents errors in reporting tax expenses, assets, and liabilities. This improves the quality of financial reporting and enables users to understand the tax implications of business activities more effectively while maintaining compliance with accounting standards and tax regulations.
- Improves Accuracy of Financial Statements
Ind AS 12 enhances the accuracy of financial statements by ensuring that both current and future tax consequences are recognised appropriately. It requires entities to account for deferred tax arising from temporary differences between accounting values and tax values. This prevents overstatement or understatement of profits, assets, and liabilities. Accurate tax accounting provides a true and fair view of the financial position and performance of an entity. As a result, users can rely on financial statements for making informed business and investment decisions.
- Promotes Transparency in Financial Reporting
One of the significant advantages of Ind AS 12 is that it improves transparency in financial reporting. The standard requires detailed disclosures about current tax, deferred tax, tax expenses, and temporary differences. These disclosures help investors, creditors, regulators, and other stakeholders understand the tax impact on the entity’s financial performance. Transparent reporting reduces uncertainty and increases confidence in published financial statements. It also enables users to assess future tax obligations and tax benefits more effectively, leading to improved financial analysis and decision-making.
- Ensures Recognition of Deferred Tax
Ind AS 12 emphasises the recognition of deferred tax assets and deferred tax liabilities arising from temporary differences. This ensures that future tax consequences of current transactions are reflected in financial statements. Recognition of deferred tax helps match tax expenses with the accounting period in which related transactions occur. It improves the accuracy of reported profits and provides a realistic picture of future tax obligations and benefits. Consequently, financial statements become more complete, reliable, and useful for evaluating long-term financial performance.
- Enhances Comparability of Financial Statements
Ind AS 12 establishes uniform accounting principles for income taxes that are applied consistently by all entities following Indian Accounting Standards. This uniformity enhances comparability between financial statements of different organisations, industries, and reporting periods. Investors, analysts, and regulators can compare tax positions and financial performance without being affected by differences in accounting methods. Improved comparability increases the usefulness of financial information and supports better evaluation of business performance across companies operating in different sectors.
- Supports Compliance with Tax and Accounting Laws
The standard helps entities comply with both accounting standards and applicable income tax laws. It provides detailed guidance for calculating current tax, recognising deferred tax, and presenting tax-related information in financial statements. Proper compliance reduces the risk of errors, penalties, and disputes with tax authorities. It also ensures that financial statements satisfy statutory reporting requirements. By integrating tax accounting with financial reporting principles, Ind AS 12 strengthens legal compliance and enhances the credibility of financial reports.
- Improves Decision-Making by Stakeholders
Ind AS 12 provides reliable information about tax expenses, tax liabilities, tax assets, and future tax consequences. This information assists investors, creditors, lenders, management, and regulators in evaluating an entity’s profitability, financial stability, and future cash flows. Accurate tax reporting reduces uncertainty regarding future tax obligations and expected tax benefits. Better understanding of tax effects enables stakeholders to make informed investment, lending, and management decisions. Therefore, Ind AS 12 contributes significantly to effective financial planning and strategic decision-making.
- Strengthens International Financial Reporting
Ind AS 12 is largely converged with International Accounting Standard (IAS) 12, making Indian financial reporting consistent with global accounting practices. This alignment improves the international comparability of financial statements prepared by Indian entities. Foreign investors, multinational corporations, and international lenders can better understand and evaluate the financial information presented. Adoption of globally accepted tax accounting principles enhances the credibility of Indian companies in international markets and supports cross-border investment, financing, and business expansion.
Limitations of Ind AS 12 – Income Taxes
- Complexity in Deferred Tax Calculation
One of the major limitations of Ind AS 12 is the complexity involved in calculating deferred tax. Entities must identify temporary differences between the carrying amounts of assets and liabilities and their tax bases. This process requires detailed analysis, technical knowledge, and continuous monitoring of tax laws. Changes in tax rates and accounting estimates further increase the complexity. Smaller entities may find it difficult to apply these requirements accurately due to limited expertise and resources. As a result, implementation of deferred tax accounting can become time-consuming and expensive.
- Heavy Dependence on Management Judgement
Ind AS 12 requires significant management judgement in recognising and measuring deferred tax assets and liabilities. Management must estimate future taxable profits to determine whether deferred tax assets should be recognised. Incorrect assumptions about future profitability may lead to overstatement or understatement of tax assets. Different management teams may reach different conclusions based on the same facts. This dependence on professional judgement reduces consistency and may affect the reliability and comparability of financial statements prepared by different entities.
- Frequent Changes in Tax Laws
Income tax laws frequently change because of amendments introduced by governments. Such changes affect tax rates, deductions, exemptions, and tax credits. Ind AS 12 requires entities to measure current and deferred taxes using enacted or substantively enacted tax rates. Frequent legislative changes increase the difficulty of maintaining accurate tax records and calculations. Entities must regularly update their accounting systems and review tax positions. This creates additional administrative work and increases the possibility of errors in financial reporting.
- Difficulty in Recognising Deferred Tax Assets
Recognition of deferred tax assets under Ind AS 12 depends on whether sufficient future taxable profits are expected to be available. Estimating future profitability is uncertain and involves assumptions regarding future business performance and market conditions. If these estimates prove inaccurate, deferred tax assets may need to be reduced or reversed. This uncertainty makes recognition difficult and may reduce the reliability of reported assets. Conservative recognition criteria may also delay the recognition of legitimate future tax benefits.
- Increased Compliance Cost
Applying Ind AS 12 increases compliance costs because entities need qualified accountants, tax professionals, and advanced accounting systems. Detailed calculations of current tax, deferred tax, temporary differences, and related disclosures require considerable effort. Regular updates for changes in tax laws and accounting standards further increase administrative expenses. Small and medium-sized enterprises may find these costs burdensome. Although the standard improves financial reporting quality, the additional compliance cost can be significant for organisations with limited financial and technical resources.
- Limited Understanding by Users
The concepts of deferred tax assets, deferred tax liabilities, temporary differences, and tax bases are highly technical. Many users of financial statements, especially non-accountants, may find these concepts difficult to understand. As a result, the information presented under Ind AS 12 may not always be easily interpreted by investors, employees, or the general public. This limitation reduces the usefulness of financial statements for users who lack accounting knowledge, despite the detailed disclosures required by the standard.
- Differences Between Accounting and Tax Rules
Ind AS 12 must be applied alongside income tax laws, which often differ significantly from accounting standards. Different recognition and measurement rules create temporary differences that require additional calculations and adjustments. Maintaining separate accounting and tax records increases complexity and workload. These differences may also create confusion during financial reporting and tax compliance. Consequently, entities must devote additional resources to reconcile accounting profit with taxable profit and ensure accurate tax reporting.
- Possibility of Frequent Revisions
Deferred tax balances recognised under Ind AS 12 may require frequent revisions because of changes in tax laws, business conditions, accounting estimates, or future profitability. Deferred tax assets may need to be written down, while deferred tax liabilities may change because of revised tax rates. These adjustments can affect reported profits and financial position from year to year. Frequent revisions reduce the stability of financial statements and make it more difficult for stakeholders to compare financial performance across different reporting periods.