Understanding Current Tax under Ind AS 12

Income tax is an essential portion of financial reporting, affecting the net profits of businesses and shaping the purposeful financial planning. Ind AS 12 – Income Taxes sets up the criteria for identifying and measuring and demonstrates income tax in financial statements. A part of the major component of Ind AS 12 is current tax, which stands for tax payable (or recoverable) on the taxable income over a time frame.

What is Current Tax?

Under Ind AS 12, current tax can be defined as the amount of income tax that is payable or recoverable with regard to taxable profit or tax loss over a time frame. It is measured with the assistance of relevant tax rates and laws implemented as of the reporting date.

Current tax is different from deferred tax, as it stands for the actual tax liabilities for the specified period, instead of future tax outcomes of temporary differences.

Key Features of Current Tax:

Here are some features of Current Tax:

Calculated Based on Taxable Profit – Unlike accounting profit, taxable profit is determined per tax regulations.

Liability or Asset Recognition – If tax is payable, it is recognized as a liability; if excess tax is paid, it is recorded as an asset.

Impact of Tax Laws – Current tax is measured using tax rates that are enacted or substantively enacted at the reporting date.

Adjustments for Prior Periods – Any over- or under-provision from previous years is adjusted in the current year’s tax expense.

Recognition of Current Tax

Ind AS 12 mandates that current tax liabilities and assets must be recognized in financial statements when they meet specific criteria.

Recognition of Current Tax Liabilities

• Current tax liability arises when an entity owes income tax for a given period.
• It is recognized as a liability when tax remains unpaid at the reporting date.
• If the tax for previous periods remains unpaid, it is also recognized as a liability.

Recognition of Current Tax Assets

• A current tax asset is recorded when an entity has paid excess tax.
• Such an asset is recognized only when it is probable that economic benefits (such as refunds or tax adjustments) will be received.

Recognition of Tax Benefits from Loss Carryback

• If a tax loss can be carried back to recover tax paid in a previous period, a current tax asset is recognized in the period the loss occurs.

Measurement of Current Tax

The computation of current tax follows specific principles:

Using Enacted Tax Rates

• Current tax is measured at the amount expected to be paid or recovered based on tax rates enacted or substantively enacted by the reporting date.

Adjustments for Previous Periods

• If prior-period taxes are underpaid or overpaid, adjustments are made in the current period’s tax expense.

Consideration of Deductions and Allowances

• Entities must account for deductions, exemptions, and incentives as permitted under tax laws.

Presentation of Current Tax in Financial Statements

Ind AS 12 provides guidance on how current tax should be presented in financial statements to ensure transparency.

Profit or Loss Statement

• Current tax expense (or income) is presented as part of total tax expense.
• Any tax adjustments related to prior periods are also included in the tax expense for the current period.

Balance Sheet

• Current tax liabilities are recorded under current liabilities.
• Current tax assets are recorded under current assets.

Cash Flow Statement

• Cash flows related to current tax are reported under operating activities.

Equity and Other Comprehensive Income (OCI)

• If current tax arises from transactions recognized in other comprehensive income (OCI) or equity, the related tax effects must also be recorded in OCI or equity.

Disclosure Requirements for Current Tax

Ind AS 12 mandates that entities disclose detailed information regarding current tax to ensure financial statement users understand its impact.

Key Disclosures Include:

Breakdown of Tax Expense:

1. • Separate disclosure of current tax expense and deferred tax expense.

Reconciliation of Accounting Profit and Tax Expense:

1. • A reconciliation between accounting profit and actual tax expense must be provided.

Adjustments for Prior Periods:

1. • Any retrospective adjustments to tax expenses must be disclosed separately.

Unrecognized Tax Assets:

1. • If an entity has unused tax losses or credits for which no deferred tax asset is recognized, it must disclose the amount and reasons.

Tax Consequences of Dividends:

1. • If dividends impact the entity’s tax expense, the relevant tax consequences must be disclosed separately.

Significance of Current Tax Accounting

Proper accounting for current tax ensures:

• Compliance with tax laws and regulations.
• Accurate financial reporting, leading to better investor confidence.
• Transparency in tax-related transactions, aiding stakeholders in assessing the company’s financial health.
• Better tax planning and decision-making for businesses.

Questions to understand your ability

Q1.) What exactly does “current tax” mean according to Ind AS 12?

A) Tax you’ll owe in the future

B) Tax you owe or can recover based on taxable profit for the period

C) Tax on temporary differences

D) Tax that doesn’t impact the current period

Q2.) If a company has paid more tax than required, how is it recognized in the financial statements?

A) It’s listed as a liability

B) It turns into an asset

C) It gets ignored altogether

D) It’s counted as revenue

Q3.) When should adjustments for tax errors from previous periods be made?

A) Never, once taxes are filed, they’re final

B) Only if the tax rate changes

C) When you’ve overpaid or underpaid taxes from earlier periods

D) Only if the tax laws are updated

Q4.) Where does current tax show up in financial statements according to Ind AS 12?

A) Just in the cash flow statement

B) Under total tax expense in the profit or loss statement

C) It’s hidden in the balance sheet as part of liabilities

D) Only under equity, not anywhere else

Q5.) If a company has unused tax losses or credits but doesn’t recognize a deferred tax asset, what do they have to disclose?

A) Nothing, it’s none of anyone’s business

B) Just the amount of those losses or credits

C) Only the reasons why they haven’t recognized the asset

D) Both the amount and the reasons for not recognizing the asset

Conclusion

Current tax, as governed by Ind AS 12, plays a fundamental role in financial reporting. It represents an entity’s actual tax obligation for a given period, directly impacting financial statements. Proper recognition, measurement, and disclosure of current tax ensure compliance, accuracy, and transparency.

By understanding the provisions of Ind AS 12, businesses can effectively manage their tax obligations, optimize tax planning, and enhance financial reporting integrity.