K.G.Acharya & Co., Chartered Accountants “Deferred Tax” Deferred Taxes are ‘Income Tax’ which arise in one period but because of Timing Difference will have to be actually paid in later years. K.G.Acharya & Co., Chartered Accountants

K.G.Acharya & Co., Chartered Accountants Timing differences -TD- Differences between TI and AI for a period that originate in one period and are capable of reversal in one or more subsequent periods. Permanent differences -PD- are the differences between TI and AI for a period that originate in one period and do not reverse subsequently. K.G.Acharya & Co., Chartered Accountants

“Deferred Tax ” Deferred Tax Taxable Income Current Tax Tax Expense As per IT Return Rs. 70 cr Current Tax (applicable rate/law) Tax Expense Accounting Income As per P&L A/c Rs. 100 cr Deferred Tax (substantively enacted rates /law) Average rate ? Timing Difference Rs. 20 cr Permanent Difference Rs. 10 cr No Tax effect K.G.Acharya & Co., Chartered Accountants

K.G.Acharya & Co., Chartered Accountants “Deferred Tax ” Accounting Income As per P&L A/c Rs. 80 cr Taxable Income As per IT Return Rs. 90 cr Current Tax Timing Difference Reversal or DTA Rs. 20 cr (DTL) or DTA Prudence Permanent Difference Rs. 10 cr No Tax effect K.G.Acharya & Co., Chartered Accountants

K.G.Acharya & Co., Chartered Accountants DTA v/s DTL Accounting Income > Taxable Income Create DTL Accounting Income < Taxable Income Reversal of DTL or Creation of DTA s.t PRUDENCE Accounting Income = Taxable Income Neither DTA nor DTL Accounting Loss = Taxable Loss Create DTA subject to PRUDENCE K.G.Acharya & Co., Chartered Accountants

K.G.Acharya & Co., Chartered Accountants Scope of AS 22 Taxes on income include all domestic and foreign taxes, which are based on taxable income Does not cover Dividend Distribution Tax. K.G.Acharya & Co., Chartered Accountants

K.G.Acharya & Co., Chartered Accountants Recognition of Deferred Tax Asset Consideration of PRUDENCE is a must while recognizing DTA DTA Arising due to Basis of Recognition Unabsorbed Business & Depreciation Loss Virtual Certainty (Judgment) & Convincing Evidence (Fact) ASI 9 Other than above Reasonable Certainty K.G.Acharya & Co., Chartered Accountants

Presentation of DT Balance Sheet (ASI-7) Share capital Reserves Secured loans Unsecured loans Deferred tax liability Total Fixed assets Investments Deferred tax asset Net Current Assets K.G.Acharya & Co., Chartered Accountants

K.G.Acharya & Co., Chartered Accountants Disclosure Break-up of major components of DTA / DTL to be disclosed. DTA and DTL to be set off if permissible under tax laws but to be shown separately otherwise. Evidence supporting the recognition of DTA to be disclosed, if an enterprise has Unabsorbed Depreciation / Tax Losses to be carried forward. K.G.Acharya & Co., Chartered Accountants

Presentation of CT - Para 27 An Enterprise should offset assets and liabilities representing current tax if the enterprise: a) has a legally enforceable right to set off the recognized amounts; and b) intends to settle the asset and the liability on a net basis K.G.Acharya & Co., Chartered Accountants

Timing Difference – Ex…. Expenses Dr. to P & L A/c on accrual basis but allowed on actual payment. Payments made without TDS, but disallowed for tax purposes u/s 40(a)(i) / (ia) and allowed when relevant tax is deducted & paid subsequently Expenditure U/s 43B of Income Tax Act Provision for Gratuity u/s 40A(7) Provisions made in the P&L A/c in anticipation of liabilities – allowed when liabilities crystallize K.G.Acharya & Co., Chartered Accountants

K.G.Acharya & Co., Chartered Accountants Timing Difference – Ex.. Provision for doubtful debts / advance Provision for warranties Preliminary expenses written off fully when incurred (U/s 35D) Expenses amortized in books of Accounts over a period of years but a shorter or longer period is allowable for tax purposes K.G.Acharya & Co., Chartered Accountants

Permanent Difference – Ex... Amortization of goodwill considered as disallowable expense Personal expenditure disallowed by tax authorities Penalty (Not being compensatory) Payments disallowed U/s 40(A)(3) Donations disallowed U/s 80G Remuneration to partners disallowed U/s 40(b) Scientific research expenditure.(only weighted element) Exemptions u/s 10/10A/10B Deductions U/s 80IA / IB / IC Financial Lease - Circular No. 2 (dtd. 9th Feb 2001 – post AS 19 tax position) Additional Depreciation on Revaluation K.G.Acharya & Co., Chartered Accountants

Financial Implication of Deferred Tax: (1) Effect of Deferred tax on Income Tax Effect on Current Ratio Affects Net Worth – Thereby affecting - Limits under Companies Acceptance of Deposits Rules - Eligibility to make investments - Determination of Sickness for BIFR purposes (4) Affects Debt -Equity Ratio and TOL / TNW (Double edged sword) K.G.Acharya & Co., Chartered Accountants

K.G.Acharya & Co., Chartered Accountants (6) Affects Net Profit Ratio (PAT/Net Sales) (7) Affects EPS Affects Dividend declaration - No specific reference in the Company Law on DT. (PBT loss V PAT Profit position – Impact on dividend and Audit report) (9) Affects Capital Adequacy Norms in case of banks (Tier-I & Tier-II Capital) - Capital to Risk Weighted Assets Ratio (CRAR) K.G.Acharya & Co., Chartered Accountants