Ind AS 12

Understanding Ind AS 12: A Deep Dive into Income Tax Accounting

Ind AS 12, or Indian Accounting Standard 12, deals with the accounting for income taxes. It prescribes how entities should account for the current and future tax consequences of transactions and other events that are recognised in their financial statements. The core objective is to ensure that businesses reflect the tax implications of all their activities, presenting a more complete and accurate picture of their financial health and performance to stakeholders.

Where Does Ind AS 12 Come From? Its Roots and Evolution

Ind AS 12 is India’s converged version of International Accounting Standard (IAS) 12 Income Taxes, issued by the International Accounting Standards Board (IASB). The Ministry of Corporate Affairs (MCA), in consultation with the Institute of Chartered Accountants of India (ICAI), notified the Indian Accounting Standards (Ind AS) as part of India’s roadmap for convergence with International Financial Reporting Standards (IFRS).

The convergence aimed to enhance the comparability of financial statements of Indian companies with their global counterparts, facilitate cross-border investments, and improve the overall quality of financial reporting. Ind AS 12 became mandatory for certain classes of companies (e.g., listed companies and large unlisted companies) from financial year 2016-17 onwards, with a phased implementation for others. This transition required companies to reassess their tax accounting practices to align with the principles of deferred taxation, which is central to Ind AS 12.

Unpacking Ind AS 12: A Detailed Explanation of Income Tax Accounting

Ind AS 12 primarily addresses the accounting for current tax and deferred tax.

Current Tax

Current tax refers to the amount of income taxes payable (or recoverable) in respect of the taxable profit (or tax loss) for the current period. It is calculated based on the tax laws and rates applicable to the period in which the taxable profit arises. While straightforward in concept, its calculation often involves adjustments for non-deductible expenses or non-taxable incomes under the prevailing tax legislation.

Deferred Tax

Deferred tax is the more complex aspect of Ind AS 12. It arises because the recognition of assets and liabilities, and expenses and income, in financial statements often differs from their recognition for tax purposes. These differences are categorised as:

• Temporary Differences: These are differences between the carrying amount of an asset or liability in the balance sheet and its tax base. They will reverse in future periods, leading to either taxable or deductible amounts.
• Tax Base: This is the amount attributed to an asset or liability for tax purposes. For an asset, it’s the amount deductible for tax purposes against any future taxable economic benefits. For a liability, it’s its carrying amount, less any amount that will be deductible for tax purposes in respect of that liability in future periods.

Temporary differences give rise to either:

• Taxable Temporary Differences (TTDs): These are temporary differences that will result in taxable amounts in determining taxable profit (tax loss) of future periods when the carrying amount of the asset or liability is recovered or settled. TTDs lead to the recognition of a Deferred Tax Liability (DTL). For example, if accounting depreciation is less than tax depreciation, the carrying amount of the asset for accounting purposes will be higher than its tax base, creating a TTD.
• Deductible Temporary Differences (DTDs): These are temporary differences that will result in amounts that are deductible in determining taxable profit (tax loss) of future periods. DTDs lead to the recognition of a Deferred Tax Asset (DTA). For instance, provisions for expenses (like doubtful debts or warranties) recognised in financial statements but only deductible for tax purposes when paid create DTDs. Similarly, unabsorbed tax losses or depreciation carried forward also give rise to DTAs.

Recognition and Measurement

• Deferred Tax Liabilities (DTLs) are generally recognised for all taxable temporary differences, with limited exceptions (e.g., initial recognition of goodwill or certain assets/liabilities from transactions not affecting accounting or taxable profit).
• Deferred Tax Assets (DTAs) are recognised only to the extent that it is probable that future taxable profits will be available against which the deductible temporary difference can be utilised. Assessing this probability requires significant judgment and often involves forecasting future taxable profits.

Both DTAs and DTLs are measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled. These are the tax rates that have been enacted or substantively enacted by the balance sheet date.

Presentation and Disclosure

Ind AS 12 also dictates the presentation of current and deferred taxes in the financial statements. Current tax assets and liabilities are presented separately, while deferred tax assets and liabilities are generally presented as non-current. Netting of deferred tax assets and liabilities is permitted only if the entity has a legally enforceable right to offset and they relate to income taxes levied by the same taxing authority. Extensive disclosures are required, including reconciliation of tax expense, explanation of significant components of tax expense, and details about unrecognised DTAs.

Why Ind AS 12 is Crucial for Business Success and Reporting Quality

Ind AS 12 is indispensable for several reasons:

• Accurate Financial Representation: It ensures that financial statements portray a true and fair view by matching the tax consequences with the underlying transactions. This provides stakeholders with a holistic understanding of a company’s past performance and future tax obligations/benefits.
• Informed Decision-Making: By quantifying the future tax impact of current transactions, Ind AS 12 helps management and investors make better decisions. For instance, understanding a company’s deferred tax position is crucial for assessing its long-term profitability and cash flow.
• Compliance and Credibility: Adherence to Ind AS 12 is mandatory for companies required to follow Ind AS. Non-compliance can lead to penalties, restatements, and a loss of credibility with regulators and investors.
• Comparability: As a converged standard, Ind AS 12 fosters comparability of financial statements across Indian companies and with international counterparts following IFRS, facilitating global investment and analysis.
• Prudent Financial Management: While not a tax planning standard, the insights gained from applying Ind AS 12 can inform tax strategy, helping companies understand the implications of various accounting choices on their future tax liabilities.

Practical Scenarios: Where Ind AS 12 Comes into Play

Ind AS 12 impacts almost every business with significant assets, liabilities, or taxable operations:

• Depreciation Differences: The most common scenario. Accounting depreciation (based on useful life) often differs from tax depreciation (based on prescribed rates), leading to temporary differences and thus deferred tax.
• Provisions and Accruals: Provisions for doubtful debts, warranties, gratuity, or other employee benefits recognised in financial statements may only be tax-deductible when actually paid, creating a Deductible Temporary Difference (DTA).
• Revaluation of Assets: If an entity revalues its Property, Plant, and Equipment (PPE) upwards, and this revaluation is not considered for tax purposes, the higher carrying amount creates a Taxable Temporary Difference (DTL).
• Unabsorbed Losses/Depreciation: When a company has carried forward tax losses or unabsorbed depreciation, these represent future tax deductions, giving rise to a Deferred Tax Asset (DTA), provided future taxable profits are probable.
• Share-based Payments: Differences in the timing and amount of expense recognition for share-based payments between accounting and tax rules often create temporary differences.
• Business Combinations: In an acquisition, the fair value adjustments made to the acquired entity’s assets and liabilities for accounting purposes will typically create temporary differences, requiring the recognition of deferred tax.

Understanding the Broader Picture: Related Concepts

Ind AS 12 interacts significantly with other accounting standards and tax regulations:

• Other Ind AS Standards: Almost every other Ind AS, such as Ind AS 16 (Property, Plant and Equipment), Ind AS 38 (Intangible Assets), Ind AS 109 (Financial Instruments), Ind AS 115 (Revenue from Contracts with Customers), etc., can create temporary differences between accounting and tax bases. Ind AS 1 (Presentation of Financial Statements) governs how tax information is displayed.
• IFRS (International Financial Reporting Standards): IAS 12 is the direct international counterpart, and understanding IFRS principles is key to interpreting Ind AS 12.
• Income Tax Act, 1961 (India): This legislation defines taxable income, allowable deductions, and tax rates, forming the fundamental basis for calculating the tax base and current tax liabilities in India.
• Minimum Alternate Tax (MAT) / Alternate Minimum Tax (AMT): Specific Indian tax provisions like MAT and AMT for companies and non-corporate entities, respectively, can add layers of complexity to deferred tax calculations and their presentation.

Staying Current: Recent Developments and Interpretations

Accounting standards are dynamic. Recent developments relevant to Ind AS 12, often stemming from IAS 12 amendments, include:

• Deferred Tax related to Assets and Liabilities arising from a Single Transaction: The IASB issued amendments to IAS 12 (effective January 1, 2023, with corresponding Ind AS amendments expected). This amendment clarifies the accounting for deferred tax on transactions that give rise to equal taxable and deductible temporary differences (e.g., leases, decommissioning liabilities). Previously, some entities applied an initial recognition exemption that would prevent the recognition of DTA/DTL in such cases. The amendment removes this exemption for specific transactions, ensuring more comprehensive deferred tax recognition.
• Impact of Tax Reforms: Changes in corporate tax rates or new tax incentives (e.g., reduced tax rates for new manufacturing companies in India) necessitate the re-measurement of existing deferred tax balances using the newly enacted or substantively enacted rates, which can have a material impact on the statement of profit and loss.
• Interpretation Committee (IFRIC) Agenda Decisions: The IFRS Interpretations Committee (IFRIC) regularly issues agenda decisions that provide guidance on specific application issues of IAS/Ind AS, including those related to income taxes, offering clarifications on complex scenarios.

Who Needs to Know: Impact on Business Functions

Ind AS 12 is not just for accountants; its implications spread across various departments:

• Finance & Accounting Department: This team bears the primary responsibility for applying Ind AS 12 principles, calculating current and deferred taxes, preparing disclosures, and ensuring accurate financial reporting.
• Tax Department: Crucial for providing the tax bases of assets and liabilities, current tax calculations, advising on tax rates, and understanding the interplay between accounting standards and tax laws.
• Management & Strategic Planning: Leaders need to understand the after-tax impact of major business decisions, mergers, acquisitions, and capital expenditure on reported profitability and cash flows.
• Internal Audit: Responsible for verifying the correct application of Ind AS 12, ensuring compliance with standards and internal policies.
• External Auditors: Essential for reviewing and attesting to the company’s financial statements, including the accuracy and completeness of income tax accounting.
• Treasury Department: Needs to be aware of cash flow implications arising from current tax payments and deferred tax settlements.

The Road Ahead: Future Trajectories for Ind AS 12

The future of Ind AS 12 will likely be shaped by several evolving factors:

• Further Convergence with IFRS: As the IASB continues to refine IAS 12, corresponding amendments will likely be adopted into Ind AS 12, ensuring ongoing alignment with global best practices.
• Complexity of Global Tax Reforms: Initiatives like the OECD’s Pillar Two (global minimum tax) are poised to introduce significant complexity into income tax accounting for multinational corporations, requiring new considerations for deferred tax calculations and disclosures.
• Technological Advancements: Automation and artificial intelligence (AI) will increasingly play a role in streamlining the complex calculations and data requirements of deferred tax, enhancing efficiency and accuracy.
• Enhanced Disclosures: There’s a growing trend towards more transparent and granular disclosures around tax strategies, risks, and effective tax rates, which might influence future amendments to Ind AS 12’s disclosure requirements.
• ESG Reporting: While not a direct accounting standard for ESG, the increasing focus on environmental, social, and governance factors might indirectly influence asset valuations, provisions, and therefore deferred tax implications in various industries.