Ind AS 12 — Income Taxes (converged with IAS 12) governs the accounting for current and deferred income taxes. The standard requires entities to recognise deferred tax for all temporary differences between accounting carrying amounts and tax bases, subject to specific exceptions. Deferred tax is one of the most pervasive and frequently misunderstood areas of financial reporting — affecting every entity that pays income tax. This guide covers the complete framework with journal entries and case studies.
Standard Reference: Ind AS 12, converged with IAS 12. Effective from Ind AS adoption date. Does not cover accounting for government grants (Ind AS 20) or investment tax credits. In India, interacts significantly with MAT (Section 115JB/115BAA) under the Income Tax Act.
| Type | Definition | Balance Sheet | P&L |
|---|---|---|---|
| Current Tax | Tax payable/recoverable for current and prior periods, based on taxable profit and enacted tax rates | Current tax liability/asset | Current tax expense |
| Deferred Tax | Future tax consequences of temporary differences between accounting and tax carrying amounts | DTA (non-current asset) or DTL (non-current liability) | Deferred tax expense/income |
A temporary difference is the difference between the carrying amount of an asset/liability in the balance sheet and its tax base (the amount attributed to it for tax purposes).
Tax Base of an Asset: Amount deductible for tax when economic benefits are recovered. Example: a machine with book value ₹60 lakh and tax WDV of ₹40 lakh → tax base = ₹40 lakh → TTD = ₹20 lakh → DTL = ₹20L × 25.168% = ₹5.03 lakh.
Tax Base of a Liability: Carrying amount less amounts deductible for tax in future periods. Example: warranty provision of ₹10 lakh (not yet deductible for tax) → tax base = ₹0 → DTD = ₹10 lakh → DTA = ₹10L × 25.168% = ₹2.52 lakh.
Recognise a DTL for all taxable temporary differences, except:
Recognise a DTA for deductible temporary differences, unused tax losses, and unused tax credits — only to the extent that it is probable that taxable profit will be available against which the deductible temporary differences can be utilised.
Scenario: ManufCo buys a machine for ₹1,00,00,000. Accounting: straight-line, 10-year life → ₹10L/year depreciation. Tax: Written Down Value method at 15% WDV → Year 1: ₹15L. Tax rate: 25.168% (including surcharge + cess).
| Year | Book WDV (₹L) | Tax WDV (₹L) | Taxable Temp Diff (₹L) | DTL (₹L) | DTL Movement |
|---|---|---|---|---|---|
| Year 1 | 90 | 85 | 5 | 1.26 | Create ₹1.26L DTL |
| Year 2 | 80 | 72.25 | 7.75 | 1.95 | Increase DTL by ₹0.69L |
| Year 5 | 50 | 44.37 | 5.63 | 1.42 | DTL reducing (book dep > tax dep) |
| Year 10 | 0 | 19.69 | -19.69 | (4.96) | DTA now; full reversal |
Scenario: ElecCo creates a warranty provision of ₹50 lakh in FY2026. Under Income Tax Act, this provision is NOT deductible until actual warranty claims are paid. Tax base of warranty liability = ₹0 (nothing deductible until paid). DTD = ₹50 lakh → DTA = ₹50L × 25.168% = ₹12.58 lakh.
Scenario: EdStart Ltd (5-year-old edtech company) has cumulative business losses of ₹200 crore and unused carry-forward losses of ₹80 crore (that can be carried forward 8 years under income tax). Management projects profitability from FY2027 onwards with ₹150 crore taxable income over next 5 years.
DTA on carry-forward losses = ₹80 Cr × 25.168% = ₹20.13 Cr
Recognition test: Is it probable that sufficient taxable income will be available? Management's projections show ₹150 Cr taxable income over 5 years — more than enough to utilise ₹80 Cr loss carryforward before expiry. If projections are supported by contracts, business plans, and market growth data: recognise ₹20.13 Cr DTA.
If there is uncertainty about profitability (e.g., company is pre-revenue, highly speculative projections): do not recognise DTA. Many VC-backed start-ups with large losses do not recognise DTA — this creates a "hidden" tax asset that will be realised when the company turns profitable.
India has two tax regimes that interact with Ind AS 12:
Since many profitable listed companies opted for the new 22% regime under Section 115BAA (which eliminated MAT for those opting in), MAT-DTA treatment has reduced complexity for many entities. However, companies still under old regime must maintain MAT credit DTA separately.
Ind AS 12 requires a reconciliation between:
Items causing the difference (tax rate reconciliation): permanent differences (expenses disallowed permanently), differential rates, tax-exempt income, uncertain tax positions, effect of deferred tax rate changes, impact of unrecognised DTA on losses.
A temporary difference creates deferred tax — it originates when accounting treatment and tax treatment differ in timing, but will ultimately reverse. E.g., accelerated tax depreciation leads to DTL that reverses when book depreciation eventually exceeds tax depreciation. A permanent difference, in contrast, never reverses — it's an amount that is either permanently taxable or permanently non-deductible. Examples: expenses disallowed under Section 37 (personal expenses, unapproved payments), exempt dividends under Section 10(34), deductions under Section 80-IC. Permanent differences affect the effective tax rate but do not create deferred tax assets or liabilities.
Yes, but with strict conditions. Even a currently loss-making company can recognise DTA on carry-forward losses if it is probable that sufficient future taxable profit will be available — this could be supported by: signed long-term contracts providing revenue certainty, demonstrated turnaround with improving trend, tax planning opportunities (e.g., a planned property sale that will generate taxable gains), or reversal of existing taxable temporary differences (existing DTL that will create taxable income). The standard does not require profitability in the current year — it requires a probability assessment of future taxable income. However, 'convincing evidence' is required when the entity has a history of recent losses.
The deferred tax rate should be the enacted (or substantively enacted) tax rate expected to apply when the temporary difference reverses. For Indian domestic companies: if operating under Section 115BAA (22% base rate), use 25.168% (22% + 10% surcharge on tax + 4% cess). If under old regime (30%), use 34.944% (30% + 12% surcharge for large companies + 4% cess). Note: the rate applicable depends on the company's expected tax regime at the time the temporary difference will reverse — if a company plans to opt for 115BAA in the near future, it may use the 115BAA rate for future reversals. Rate changes must be reflected in deferred tax in the period when the new rate is enacted.
Ind AS 12 — Income Taxes (converged with IAS 12) governs the accounting for current and deferred income taxes. The standard requires entities to recognise deferred tax for all temporary differences between accounting carrying amounts and tax bases, subject to specific exceptions. Deferred tax is one of the most pervasive and frequently misunderstood areas of financial reporting — affecting every entity that pays income tax. This guide covers the complete framework with journal entries and case studies.
Standard Reference: Ind AS 12, converged with IAS 12. Effective from Ind AS adoption date. Does not cover accounting for government grants (Ind AS 20) or investment tax credits. In India, interacts significantly with MAT (Section 115JB/115BAA) under the Income Tax Act.
| Type | Definition | Balance Sheet | P&L |
|---|---|---|---|
| Current Tax | Tax payable/recoverable for current and prior periods, based on taxable profit and enacted tax rates | Current tax liability/asset | Current tax expense |
| Deferred Tax | Future tax consequences of temporary differences between accounting and tax carrying amounts | DTA (non-current asset) or DTL (non-current liability) | Deferred tax expense/income |
A temporary difference is the difference between the carrying amount of an asset/liability in the balance sheet and its tax base (the amount attributed to it for tax purposes).
Tax Base of an Asset: Amount deductible for tax when economic benefits are recovered. Example: a machine with book value ₹60 lakh and tax WDV of ₹40 lakh → tax base = ₹40 lakh → TTD = ₹20 lakh → DTL = ₹20L × 25.168% = ₹5.03 lakh.
Tax Base of a Liability: Carrying amount less amounts deductible for tax in future periods. Example: warranty provision of ₹10 lakh (not yet deductible for tax) → tax base = ₹0 → DTD = ₹10 lakh → DTA = ₹10L × 25.168% = ₹2.52 lakh.
Recognise a DTL for all taxable temporary differences, except:
Recognise a DTA for deductible temporary differences, unused tax losses, and unused tax credits — only to the extent that it is probable that taxable profit will be available against which the deductible temporary differences can be utilised.
Scenario: ManufCo buys a machine for ₹1,00,00,000. Accounting: straight-line, 10-year life → ₹10L/year depreciation. Tax: Written Down Value method at 15% WDV → Year 1: ₹15L. Tax rate: 25.168% (including surcharge + cess).
| Year | Book WDV (₹L) | Tax WDV (₹L) | Taxable Temp Diff (₹L) | DTL (₹L) | DTL Movement |
|---|---|---|---|---|---|
| Year 1 | 90 | 85 | 5 | 1.26 | Create ₹1.26L DTL |
| Year 2 | 80 | 72.25 | 7.75 | 1.95 | Increase DTL by ₹0.69L |
| Year 5 | 50 | 44.37 | 5.63 | 1.42 | DTL reducing (book dep > tax dep) |
| Year 10 | 0 | 19.69 | -19.69 | (4.96) | DTA now; full reversal |
Scenario: ElecCo creates a warranty provision of ₹50 lakh in FY2026. Under Income Tax Act, this provision is NOT deductible until actual warranty claims are paid. Tax base of warranty liability = ₹0 (nothing deductible until paid). DTD = ₹50 lakh → DTA = ₹50L × 25.168% = ₹12.58 lakh.
Scenario: EdStart Ltd (5-year-old edtech company) has cumulative business losses of ₹200 crore and unused carry-forward losses of ₹80 crore (that can be carried forward 8 years under income tax). Management projects profitability from FY2027 onwards with ₹150 crore taxable income over next 5 years.
DTA on carry-forward losses = ₹80 Cr × 25.168% = ₹20.13 Cr
Recognition test: Is it probable that sufficient taxable income will be available? Management's projections show ₹150 Cr taxable income over 5 years — more than enough to utilise ₹80 Cr loss carryforward before expiry. If projections are supported by contracts, business plans, and market growth data: recognise ₹20.13 Cr DTA.
If there is uncertainty about profitability (e.g., company is pre-revenue, highly speculative projections): do not recognise DTA. Many VC-backed start-ups with large losses do not recognise DTA — this creates a "hidden" tax asset that will be realised when the company turns profitable.
India has two tax regimes that interact with Ind AS 12:
Since many profitable listed companies opted for the new 22% regime under Section 115BAA (which eliminated MAT for those opting in), MAT-DTA treatment has reduced complexity for many entities. However, companies still under old regime must maintain MAT credit DTA separately.
Ind AS 12 requires a reconciliation between:
Items causing the difference (tax rate reconciliation): permanent differences (expenses disallowed permanently), differential rates, tax-exempt income, uncertain tax positions, effect of deferred tax rate changes, impact of unrecognised DTA on losses.
A temporary difference creates deferred tax — it originates when accounting treatment and tax treatment differ in timing, but will ultimately reverse. E.g., accelerated tax depreciation leads to DTL that reverses when book depreciation eventually exceeds tax depreciation. A permanent difference, in contrast, never reverses — it's an amount that is either permanently taxable or permanently non-deductible. Examples: expenses disallowed under Section 37 (personal expenses, unapproved payments), exempt dividends under Section 10(34), deductions under Section 80-IC. Permanent differences affect the effective tax rate but do not create deferred tax assets or liabilities.
Yes, but with strict conditions. Even a currently loss-making company can recognise DTA on carry-forward losses if it is probable that sufficient future taxable profit will be available — this could be supported by: signed long-term contracts providing revenue certainty, demonstrated turnaround with improving trend, tax planning opportunities (e.g., a planned property sale that will generate taxable gains), or reversal of existing taxable temporary differences (existing DTL that will create taxable income). The standard does not require profitability in the current year — it requires a probability assessment of future taxable income. However, 'convincing evidence' is required when the entity has a history of recent losses.
The deferred tax rate should be the enacted (or substantively enacted) tax rate expected to apply when the temporary difference reverses. For Indian domestic companies: if operating under Section 115BAA (22% base rate), use 25.168% (22% + 10% surcharge on tax + 4% cess). If under old regime (30%), use 34.944% (30% + 12% surcharge for large companies + 4% cess). Note: the rate applicable depends on the company's expected tax regime at the time the temporary difference will reverse — if a company plans to opt for 115BAA in the near future, it may use the 115BAA rate for future reversals. Rate changes must be reflected in deferred tax in the period when the new rate is enacted.