Library / Technical Accounting Manual: IFRS, IAS and Ind AS Equivalents

IAS 12 - Income Taxes

Indian equivalent: Ind AS 12 - Income Taxes

Objective and scope

IAS 12 explains accounting for taxes - not only the tax on this year's profit (current tax) but the future tax effects (deferred tax) that arise because accounting rules and tax rules recognise income and expenses in different periods.

Core principle

Accountants and the tax authority often count the same item in different years. IAS 12 captures the future tax consequence of these timing gaps using deferred tax, computed on temporary differences between an item's accounting value and its tax value - so the accounts show the real, ultimate tax cost, not just this year's cheque to the government.

Defined terms and technical terminology

Term	Technical meaning
Current tax	Tax payable (or recoverable) on this period's taxable profit at enacted rates.
Taxable profit	Profit computed under tax law, which differs from accounting profit.
Deferred tax	Tax to be paid or recovered in future periods from temporary differences.
Temporary difference	The gap between an asset/liability's carrying (accounting) amount and its tax base, which reverses over time.
Tax base	The amount attributed to an asset or liability for tax purposes.
Deferred tax liability (DTL)	Future tax payable - arises from taxable temporary differences (taxed less now, more later).
Deferred tax asset (DTA)	Future tax saving - from deductible temporary differences, unused losses or credits; recognised only if probable future profits will absorb it.

Application and worked illustrations

Current vs deferred

Current tax is straightforward - the tax bill on this year's taxable profit. Deferred tax is the clever part. Because accounting and tax count things at different times, an item can have a different value in the accounts than for tax. That difference is temporary - it will reverse - and IAS 12 records the tax effect of that reversal today.

Worked example 1 - deferred tax liability from depreciation

A company buys a machine for ₹10,00,000. Accounting depreciates it ₹1,00,000/year (10 years). Tax allows ₹2,00,000 in year 1 (accelerated). After year 1: accounting carrying amount = ₹9,00,000; tax base = ₹8,00,000; temporary difference = ₹1,00,000. At a 25% rate, a deferred tax liability of ₹25,000 is recorded - the company saved tax now and will pay ₹25,000 more later.

Journal entry - Record the deferred tax
Account	Debit (₹)	Credit (₹)
Tax expense (P&L)	25,000
Deferred tax liability		25,000

Worked example 2 - deferred tax asset from a loss

A company makes a tax loss of ₹4,00,000 that can be carried forward. The future saving = ₹4,00,000 × 25% = ₹1,00,000, recorded as a deferred tax asset - but only if it is probable the company will earn enough future taxable profit to use it. If the company is chronically loss-making, prudence says do not recognise the asset.

Worked example 3 - a difference with no deferred tax

Some differences are permanent, not temporary - e.g., a fine that is never tax-deductible. Permanent differences create no deferred tax because they never reverse. Only temporary differences generate deferred tax.

Common mistake: recognising a deferred tax asset in full without testing recoverability. A DTA is only recognised to the extent future taxable profit is probable.

Common mistake: using the accounting profit rate. Deferred tax is measured at the tax rate expected to apply when the difference reverses (enacted or substantively enacted).

IND AS LINK

Ind AS 12 uses the same balance-sheet temporary-difference approach as IAS 12. This was a significant change from old Indian GAAP (AS 22), which used the simpler income-statement (timing-difference) approach. Companies must also consider the interplay with MAT (Minimum Alternate Tax) credits, treated as deferred tax assets.

Further worked illustrations

Extra numeric example - deferred tax on a provision

A company books a ₹4,00,000 warranty provision this year (IAS 37). Tax law allows the deduction only when the warranty is actually paid, not when provided. So the accounting expense is ₹4,00,000 now, but the tax deduction comes later - a deductible temporary difference. At 25%, the company recognises a deferred tax asset of ₹1,00,000 (a future tax saving), provided future profits are probable.

Journal entry - Recognise the deferred tax asset
Account	Debit (₹)	Credit (₹)
Deferred tax asset	1,00,000
Tax expense (P&L)		1,00,000

INDIAN REGULATORY CONTEXT

Indian companies paying Minimum Alternate Tax (MAT) because their book profits exceed taxable profits earn a MAT credit usable in future years. Under Ind AS 12, this credit is treated like a deferred tax asset - recognised only to the extent it is probable the company will pay normal tax in future and thus actually use the credit.

TECHNICAL EDGE CASE

A company revalues land upward by ₹50,00,000 (gain in OCI, IAS 16). Tax base is unchanged, so a taxable temporary difference of ₹50,00,000 arises → a deferred tax liability of ₹12,50,000 (at 25%). Crucially, because the revaluation gain went to OCI, the related deferred tax also goes to OCI, not profit - the tax 'follows the item'. No cash has changed hands, yet a liability appears.

Extended technical analysis

The balance sheet liability method - full mechanics

IAS 12 applies the balance sheet liability method. Deferred tax is not computed on differences between accounting and taxable profit (the income statement approach), but on temporary differences between the carrying amount of an asset or liability and its tax base. This distinction is fundamental: it captures differences arising from revaluations, business combinations and OCI items that an income-statement approach would miss entirely.

Determining the tax base

Tax Base - Determination Rules
Item	Tax base definition	Illustration
Asset	The amount deductible for tax purposes against future taxable economic benefits.	Machine carrying ₹9,00,000; tax WDV ₹8,00,000 → tax base ₹8,00,000
Asset (benefits not taxable)	Tax base equals carrying amount → no temporary difference.	Interest receivable already taxed → tax base = carrying amount
Liability	Carrying amount less any amount deductible for tax in future periods.	Warranty provision ₹4,00,000, deductible when paid → tax base ₹0
Revenue received in advance	Carrying amount less amounts not taxable in future.	Advance ₹1,00,000 already taxed on receipt → tax base ₹0

Temporary difference classification

IAS 12 - Deferred Tax Determination Decision Tree
■ Compute Carrying Amount (CA) and Tax Base (TB) of each asset/liability
▼
◆ Is there a difference between CA and TB?
▼
✖ NO → No deferred tax arises
▼
◆ YES → Is the difference TEMPORARY (will reverse) or PERMANENT (never reverses)?
▼
✖ PERMANENT (e.g. non-deductible fines, exempt income) → NO deferred tax
▼
✔ TEMPORARY → Determine direction
▼
▸ ASSET: CA > TB, or LIABILITY: CA < TB → TAXABLE temporary difference → DEFERRED TAX LIABILITY
▼
▸ ASSET: CA < TB, or LIABILITY: CA > TB → DEDUCTIBLE temporary difference → DEFERRED TAX ASSET
▼
▸ DTL: recognise in full (subject to initial recognition & specific exemptions)
▼
■ DTA: recognise ONLY to the extent future taxable profit is PROBABLE (IAS 12.24, 12.34)

Measurement and the recognition exemptions

Deferred tax is measured at the tax rates expected to apply in the period of reversal, based on rates enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are never discounted, because the scheduling of reversals would be impracticable and would introduce spurious precision. Deferred tax must not be recognised on: (a) the initial recognition of goodwill; and (b) the initial recognition exemption - an asset or liability in a transaction that is not a business combination and affects neither accounting profit nor taxable profit at the time.

Comprehensive worked illustration - multiple differences

Deferred Tax Computation (tax rate 25%)
Item	Carrying amount (₹)	Tax base (₹)	Temporary difference (₹)	Nature	DTA / (DTL) (₹)
Property, plant and equipment	90,00,000	78,00,000	12,00,000	Taxable	(3,00,000)
Warranty provision	4,00,000	-	4,00,000	Deductible	1,00,000
Provision for doubtful debts (ECL)	6,00,000	-	6,00,000	Deductible	1,50,000
Revaluation surplus on land	20,00,000	12,00,000	8,00,000	Taxable	(2,00,000)
Unabsorbed business loss carried forward	-	-	10,00,000	Deductible	2,50,000
Net deferred tax position					(0)

In the illustration above the aggregate DTA of ₹5,00,000 and DTL of ₹5,00,000 offset to nil. Note two critical points. First, the deferred tax on the revaluation surplus is recognised in OCI, not profit or loss, because IAS 12.61A requires the tax to follow the item it relates to. Second, the DTA on the unabsorbed loss may be recognised only where convincing evidence of future taxable profit exists - the existence of recent losses is strong evidence against recognition.

Journal entry - Deferred tax on revaluation surplus - tax follows the item
Account	Debit (₹)	Credit (₹)
Other Comprehensive Income - deferred tax	2,00,000
Deferred tax liability		2,00,000

Deferred tax in a business combination

In a business combination, identifiable assets and liabilities are measured at fair value while their tax bases typically remain at the acquiree's carryover values. The resulting temporary differences generate deferred tax that is recognised as part of the acquisition accounting, thereby affecting goodwill. A common consequence: recognising a customer-relationship intangible of ₹5 crore with a nil tax base creates a DTL of ₹1.25 crore (at 25%), which increases goodwill by the same amount.

IFRS vs Ind AS - Comparative Analysis
Aspect	IFRS / IAS position	Ind AS position (carve-out / carve-in)
Conceptual approach	Balance sheet liability method on temporary differences.	Ind AS 12 - identical. This replaced AS 22, which used the income statement timing-difference approach.
MAT credit	No direct IFRS equivalent concept.	Carve-in: MAT credit entitlement is treated as a deferred tax asset, recognised only when probable the entity will pay normal tax and utilise the credit.
Presentation	Non-current classification; offset only where legally enforceable right exists.	Same; Schedule III requires presentation of deferred tax assets/liabilities (net).
Rate used	Enacted or substantively enacted.	In India, rates are treated as substantively enacted on passing of the Finance Act.
Uncertain tax positions	IFRIC 23 governs uncertainty over income tax treatments.	Appendix C to Ind AS 12 carries IFRIC 23 - highly relevant given India's litigious tax environment.