Introduction to AS 22
Accounting Standard 22 (AS 22) deals with the accounting for taxes on income. It is based on the fundamental principle of matching tax expenses with the revenue of the same accounting period.
However, applying this matching concept is not always straightforward. In many cases, taxable income differs significantly from accounting income, leading to complexities in tax accounting.
These differences arise mainly due to:
- Differences in recognition of revenue and expenses between accounting records and tax laws
- Differences in the amount of revenue or expenses considered for accounting and tax purposes
Why Accounting Income Differs from Taxable Income
1. Difference in Recognition of Items
Certain items recorded in the statement of profit and loss may not be treated the same way under tax laws. Some revenues or expenses may be:
- Fully allowed
- Partially allowed
- Disallowed
2. Difference in Measurement
Even when items are recognized in both accounting and tax records, the amounts may differ, leading to variations in income calculations.
Types of Differences in AS 22
1. Timing Differences
Timing differences are those differences between accounting income and taxable income that:
- Originate in one period
- Reverse in one or more future periods
👉 Example: Depreciation calculated differently for accounting and tax purposes.
2. Permanent Differences
Permanent differences:
- Arise in one period
- Do not reverse in future periods
👉 Example: Expenses disallowed permanently under tax laws.
Recognition of Tax Expense
Both must be included while calculating net profit or loss for the period. According to AS 22, total tax expense includes:
- Current Tax – Tax payable for the current year
- Deferred Tax – Tax impact of timing differences
Measurement of Taxes
1. Current Tax
- Measured as the amount expected to be paid or recovered
- Based on applicable tax rates and tax laws
Deferred Tax
- Calculated using enacted or substantively enacted tax rates
- Not discounted to present value
Deferred Tax Assets – Reassessment
At every balance sheet date, deferred tax assets must be reviewed. Previously unrecognized assets can be recorded if there is:
- Reasonable certainty, or
- Virtual certainty of future taxable income
- The carrying amount must be regularly reassessed
Disclosure Requirements under AS 22
AS 22 provides flexibility but requires key disclosures:
- No mandatory requirement to show current tax and deferred tax separately in the profit and loss account
- No requirement for reconciliation between accounting profit and tax expense
Mandatory disclosure of:
- Breakdown of deferred tax assets and liabilities
- Separate presentation in the balance sheet (not under current assets/liabilities)
Special Cases under AS 22
1. Tax Holiday (Sections 80-IA and 80-IB)
- Deferred tax for timing differences reversing during the tax holiday period should not be recognized
- Deferred tax for differences reversing after the tax holiday should be recognized in the year of origin
- Must follow the prudence principle
2. Tax Holiday (Sections 10A and 10B)
- No recognition for timing differences that both originate and reverse during the tax holiday
- Recognition is required if differences reverse after the tax holiday period
- Deferred tax assets recognized only with prudent consideration
3. Minimum Alternate Tax – Section 115JB
- Tax paid under Section 115JB is treated as current tax
- Deferred tax must be calculated using regular tax rates, not MAT rates
- Even if reversal occurs during MAT applicability, regular tax rates apply
Conclusion: AS 22 summary
Accounting Standard 22 (AS 22) ensures accurate matching of tax expenses with accounting income by addressing differences between taxable and accounting profits.
It provides clear guidance on:
- Recognition of tax expenses
- Measurement of current and deferred taxes
- Disclosure requirements
- Treatment of special cases like tax holidays and MAT
Understanding AS 22 is essential for accurate financial reporting and compliance with tax regulations.