Income taxes as per the Indian Accounting Standard 12 include both domestic and foreign taxes, which are based on taxable profits. It also includes withholding taxes.
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:
Ind AS 12 is based on the Balance Sheet approach. It requires recognising tax consequences of the difference between the carrying amounts of assets and liabilities and their tax base.
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 liability is the amount of income tax payable in future periods with respect to the taxable temporary differences.
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.
Temporary differences are the differences between the carrying amount of an asset or liability in the balance sheet and its tax base.
Tax Base of an asset or liability is the amount attributed to the asset or liability for tax purposes.
Deferred tax liability will be recognised for all taxable temporary differences. However, the following are exceptions to the same:
A deferred tax asset will be recognised for all the deductible temporary differences, provided it is probable that the taxable profit will be available for utilisation of deductible temporary differences. The restrictions being that if the asset arises from the initial recognition of asset or liability in a transaction that which is not a business combination and neither affects accounting profit or taxable profit at the time of transaction.
Current tax assets or liability will be measured as the amount expected to be recovered or paid to the tax authorities at the tax rate and laws that have been enacted or subsequently enacted by the end of the reporting period. Deferred tax assets or liability will be measured at the expected tax rates in the period in which the asset is realised or liability paid based on the tax laws that have been enacted or subsequently enacted at the end of the reporting period.
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 major components of tax expense or income will be disclosed separately.
As per this standard, an entity must account for tax consequences in the same way as it accounts for the transactions and other events. Therefore, if the transaction and other events are recognised in profit and loss, then the related tax consequences should also be recognised in profit and loss. If the transaction and event is recognised outside profit and loss that is in other comprehensive income or directly in equity, then the tax consequence will also be recognised outside the profit and loss that is in other comprehensive income or directly in equity.