AS 22 Accounting for Taxes on Income: A Practitioner Guide for FY 2026-27
AS 22 (Accounting for Taxes on Income) is the Indian Accounting Standard that prescribes when and how to recognise current and deferred taxes in financial statements. The standard ensures that the tax expense reflects both current and future tax consequences of accounting transactions.
The Institute of Chartered Accountants of India (ICAI) issued AS 22 under the Companies (Accounting Standards) Rules, 2006. It remains reaffirmed in the Companies (Accounting Standards) Rules, 2021. The standard became mandatory from 1 April 2001 for Level I enterprises and was subsequently phased in for Level II and III entities. It replaced the earlier ICAI guidance on tax accounting.
For FY 2026-27, manufacturing companies with significant capital expenditure face large deferred tax liabilities due to differences in depreciation rates under the Companies Act and the Income-tax Act. This impacts profit reporting and balance sheet presentation.
AS 22 at a Glance
AS 22 requires entities to account for both current and deferred taxes based on timing differences between accounting income and taxable income. This standard primarily serves companies preparing financial statements under the Indian GAAP (non-Ind AS) framework.
| Field | Value |
|---|---|
| Standard Number | AS 22 |
| Full Name | Accounting for Taxes on Income |
| Issuing Body | ICAI (Accounting Standards Board) |
| Notified By | MCA, Companies (Accounting Standards) Rules, 2006 (reaffirmed in Companies (Accounting Standards) Rules, 2021) |
| Effective Date | 1 April 2001 for Level I enterprises; phased for Levels II and III |
| Supersedes | ICAI Accounting Standard issued in February 2001 |
| Equivalent Standard | AS 22 ↔ Ind AS 12 ↔ IAS 12 |
| Applies To | All Level I, Level II, and Level III enterprises preparing financial statements under the Accounting Standards framework. Ind AS-applicable companies follow Ind AS 12 instead. |
What is AS 22: Accounting for Taxes on Income?
AS 22 sets out principles for recognising current tax liabilities or assets based on taxable income as per the Income-tax Act, as well as deferred tax arising from timing differences between accounting profit and taxable profit. The standard ensures that all tax effects related to transactions are matched with their corresponding periods in the financial statements.
ICAI introduced this standard to address inconsistencies in how companies accounted for deferred taxes before its issuance. The move aligned Indian GAAP with global best practices by requiring systematic recognition of both current and future tax effects. The predecessor was an ICAI-issued guidance note; international convergence is seen with Ind AS 12 and IAS 12.
Accountants, statutory auditors, CFOs, finance teams in Indian corporates not covered by Ind AS, and CA students most frequently use this standard.
Objective of AS 22
- Prescribe the accounting treatment for taxes on income, including current tax and deferred tax.
- Match the tax effect of transactions and other events with the period in which they are recognised in the financial statements.
- Ensure that the tax expense reported in the statement of profit and loss reflects both current and future tax consequences of transactions during the period.
By achieving these objectives, AS 22 upholds the “true and fair view” principle mandated by Section 129 of the Companies Act, 2013. Proper application ensures users can rely on reported profits as reflecting all relevant tax effects, both present and future, arising from business activity.
Who Must Apply AS 22?
Entities covered
AS 22 applies to all companies classified as Level I, II or III enterprises that prepare financial statements using notified Accounting Standards under Indian GAAP (non-Ind AS). The table below summarises applicability:
| Entity Category | Applicability |
|---|---|
| Level I enterprises | Mandatory since FY 2001-02 |
| Level II enterprises | Phased introduction after Level I |
| Level III enterprises | Phased introduction after Level II |
Ind AS-applicable companies must apply Ind AS 12 (Income Taxes), not AS 22.
Scope exclusions
The following items are outside the scope of AS 22:
- Indirect taxes such as GST, excise duty, customs duty, stamp duty
- Government grants accounted under AS 12, even if linked to taxable income
- Investment tax credits not directly related to taxes on income
When the standard does not apply
Where excluded items arise:
- Indirect taxes are covered separately by standards such as GST Law or Schedule III presentation rules.
- Government grants fall under AS 12.
- Investment tax credits are governed by relevant notifications or standards outside income-tax accounting.
Companies following Ind AS must refer to Ind AS 12 instead.
Key Definitions under AS 22
| Term | Definition |
|---|---|
| Current tax | Tax payable on taxable income of a period per Income-tax Act, 1961 |
| Deferred tax | Tax effect of timing differences reversing across periods |
| Timing differences | Differences between taxable income and accounting income that reverse over time |
| Permanent differences | Differences between taxable income and accounting income that do not reverse |
| Deferred tax asset (DTA) | Asset from timing differences reducing future taxable income |
| Deferred tax liability (DTL) | Liability from timing differences increasing future taxable income |
Deferred taxes arise only from timing differences, not permanent differences, between book profit and taxable profit.
Recognition and Measurement under AS 22
When to recognise
An entity must recognise current tax as a liability or asset based on taxable profits computed per Income-tax Act provisions. Deferred tax arises from timing differences between accounting profit (per Companies Act/ICAI standards) and taxable profit (per Income-tax Act). The entity recognises a deferred tax liability or asset when such timing differences originate or reverse during a period.
Deferred Tax Assets (DTA) are recognised only if there is reasonable certainty that sufficient future taxable income will be available against which such DTA can be realised. For DTAs relating to unabsorbed depreciation or carry-forward business losses under Section 72/32(2) of the Income-tax Act, virtual certainty supported by convincing evidence is required (Para 17).
Permanent differences, such as disallowed expenses never deductible or exempt incomes never taxed, do not give rise to deferred taxes.
Initial measurement
Current tax is measured at amounts expected to be paid or recovered using rates enacted or substantively enacted at balance sheet date. Deferred taxes are measured using applicable rates/laws expected when timing differences reverse; these must also be enacted or substantively enacted at reporting date.
**Deferred Tax Calculation Formula:**
Deferred Tax Asset/Liability = Timing Difference × Applicable Tax Rate
The entity must use enacted rates even if subsequent changes are anticipated but not yet law at year-end.
Subsequent measurement
At each balance sheet date:
Review carrying amount of DTA.
Write down DTA if it is no longer reasonably certain, or virtually certain for losses/unabsorbed depreciation, that sufficient future profits will exist.
Reverse previous write-downs if circumstances change so certainty returns.
Carrying amount of DTL is adjusted each period based on reversals/originations of new timing differences using updated rates where necessary.
MAT credit entitlement is recognised as an asset only if there is convincing evidence that normal income-tax liability will arise within MAT credit carry-forward period, as per ICAI Guidance Note.
The Liability Method Based on Timing Differences
AS 22 uses an “income-statement-based” liability method focusing solely on timing differences, not temporary differences as under Ind AS 12/IAS 12. Timing differences arise where items affect accounting profit/loss in one period but affect taxable profit/loss in another, for example:
- Depreciation calculated differently under Companies Act vs Income-tax Act
- Provisions allowed only when actually written off
- Statutory dues deductible only upon payment per Section 43B
MAT credit entitlement is accounted as an asset following ICAI’s Guidance Note, not directly addressed within bare-text paragraphs but required practice across industries.
In our audit practice we frequently observe that manufacturing entities generate significant DTLs due to higher initial depreciation claims allowed by taxation rules compared with book depreciation, a pattern reversed over later years as book depreciation exceeds allowable deductions.
Worked Examples on AS 22
Example 1: Deferred tax on depreciation timing difference
Maharashtra Cement Ltd buys a plant costing Rs 100 crore on April 1st, 2025. Depreciation per Companies Act is straight-line at 5% per annum; Income-tax allows WDV method at 15% block rate in FY 2025-26; applicable corporate tax rate including surcharge/cess is 25.17%.
Computation Table
| Particulars | Book Value / Rate | Amount / Calculation |
|---|---|---|
| Plant cost | Rs 100 crore | Rs 100 crore |
| Book depreciation | Straight line @5% | Rs 5 crore |
| Tax depreciation | WDV @15% | Rs 15 crore |
| Timing difference | Rs 10 crore | |
| Applicable Tax Rate | ×25.17% | |
| Deferred Tax Liability | Rs 2.52 crore |
Journal Entry
Dr Deferred Tax Expense (P&L): Rs 2.52 crore
Cr Deferred Tax Liability (Balance Sheet): Rs 2.52 crore
This DTL will reverse over subsequent years when book depreciation exceeds allowable deductions for taxation purposes.
Example 2: Deferred tax asset on carried-forward business losses
Ramesh Textiles Pvt Ltd has accumulated business losses amounting to Rs 8 crore as at March 31st, 2026 per Income-tax records. In March 2026 management signs an export contract worth Rs 25 crore expected to restore profitability from FY 2026-27 onwards.
Computation Table
| Particulars | Amount / Basis | Calculation |
|---|---|---|
| Carried-forward business loss | As per IT records | Rs 8 crore |
| Virtual certainty test | Signed export contract | Satisfied |
| Applicable Tax Rate | ×25.17% | |
| Deferred Tax Asset | Rs 2.01 crore |
Journal Entry
Dr Deferred Tax Asset: Rs 2.01 crore
Cr Deferred Tax (P&L credit): Rs 2.01 crore
Disclosure must state nature of evidence supporting virtual certainty, here being a signed export contract providing convincing evidence that sufficient profits will arise enabling utilisation of carried-forward losses against future taxable profits.
Disclosure Requirements under AS 22
Schedule III to the Companies Act, 2013, and AS 22 both require clear disclosure of current and deferred tax impacts. Transparent reporting ensures users understand the sources and reversals of timing differences, the basis for deferred tax asset recognition, and any material deviations from statutory rates.
| Item | Requirement | Para Reference |
|---|---|---|
| Components of tax expense | Separate disclosure of current tax and deferred tax in the statement of profit and loss | Para 30 |
| Reconciliation of tax expense with rate | Where tax expense materially differs from accounting profit at applicable rate, disclose reconciling items | Para 30 |
| Major components of deferred taxes | Disclose by nature of timing differences (e.g., depreciation, provisions, carry-forward losses) | Para 31 |
| Nature of evidence for DTA recognition | For DTA on unabsorbed depreciation or losses, disclose nature of convincing evidence supporting virtual certainty | Para 17 |
| MAT credit entitlement | Disclose MAT credit entitlement asset, with expected utilisation period | ICAI Guidance Note on MAT Credit |
| Presentation in balance sheet | Deferred tax assets/liabilities disclosed separately as non-current; offsetting permitted only if legal right and intent exist | Para 27 |
Auditors must ensure these disclosures are complete and accurate to comply with SA 700’s “true and fair view” requirement.
Common Mistakes & Industry-Specific Considerations
Common errors auditors flag
- Recognising deferred tax on permanent differences (e.g., disallowed expenses under Section 37 of the Income-tax Act)
- Recognising DTA on carry-forward business losses without convincing evidence of virtual certainty
- Failure to use enacted or substantively enacted tax rates expected to apply when the timing difference reverses
- Inconsistent treatment of MAT credit entitlement, particularly in the year of MAT applicability
- Offsetting DTA and DTL where the legally enforceable right does not exist
- Not reviewing carrying amount of DTA at each balance sheet date when the certainty of future taxable income changes
Industry application notes
Manufacturing with capex:
Heavy capital expenditure leads to large deferred tax liabilities because tax depreciation under written down value method usually exceeds Companies Act depreciation in early years. The liability reverses as book depreciation overtakes allowable deductions in later years.
Real estate:
Real estate developers often face complex timing differences due to project-completion accounting under AS versus income-tax recognition based on agreement registration. Accurate deferred tax disclosure must clearly explain these differences for users.
Loss-making entities:
Deferred tax asset recognition on unabsorbed depreciation or business losses demands “virtual certainty”. Auditors typically require robust evidence such as signed export contracts or board-approved business plans before accepting management’s projections.
AS 22 vs Ind AS 12 vs IFRS: Key Differences
The table below compares AS 22 (Accounting Standards), Ind AS 12 (Indian Accounting Standards), and IAS 12 (IFRS) across key aspects:
| Aspect | AS | Ind AS | IFRS |
|---|---|---|---|
| Approach | Income statement approach (timing differences) | Balance sheet approach (temporary differences) | Same as Ind AS |
| DTA recognition threshold | Reasonable certainty (general); virtual certainty for losses/unabsorbed depreciation | Probable that future taxable profit will be available | Same as Ind AS |
| Initial recognition exemption | Not specifically addressed | Available for certain transactions (Para 15 of Ind AS 12) | Same as Ind AS |
| Tax effect on revaluation | Not applicable (revaluations not common under AS) | Tax effect recognised in OCI for revaluation in OCI | Same as Ind AS |
| Uncertain tax positions | Limited guidance | Appendix C provides specific guidance | IFRIC 23 provides guidance |
| Presentation | Non-current asset/liability; offsetting if legal right and intent | Same approach with similar offsetting rules | Same as Ind AS |
India’s adoption of a timing-difference model under AS diverges from global practice. The balance-sheet approach under Ind AS/IFRS captures more temporary differences but requires more granular tracking. Several carve-outs exist in Indian GAAP due to legacy practices and regulatory requirements.
Latest Amendments to AS 22 (FY 2026-27)
No amendments have been notified to AS 22 for FY 2026-27 as of 2026-05-02. The standard continues to apply in its existing form.
Related Standards You Should Know
- [Ind AS 12](/ind-as-12-income-taxes/), Equivalent income tax standard under the Ind AS framework, using temporary differences instead of timing differences.
- [AS 5](/as-5-net-profit-prior-period-changes/), Prior period tax adjustments are accounted for under AS 5.
- [AS 29](/as-29-provisions-contingent-liabilities/), Provisions for tax disputes follow AS 29 if criteria are met.
- [AS 4](/as-4-contingencies-and-events-after-bs-date/), Tax-related events occurring after balance sheet date are evaluated under AS 4.
Need Help with AS 22 Compliance?
Patron Accounting LLP supports companies across India with expert guidance on all aspects of AS 22 compliance. Our team brings deep experience assisting manufacturing, real estate, and service sector clients with practical solutions tailored to their needs.
Our services include:
- Statutory Audit
- Financial Reporting & Schedule III compliance
- Disclosure Review
- Ind AS Advisory
Schedule a 30-minute consultation with our Ind AS team, Pune · Mumbai · Delhi · Gurugram.
Frequently Asked Questions (FAQs)
All Level I, II, and III enterprises preparing financial statements using Indian GAAP Accounting Standards must apply AS 22. Companies following Ind AS apply Ind AS 12 instead. Applicability is set by the Ministry of Corporate Affairs through Companies (Accounting Standards) Rules.
Current tax is the amount payable based on taxable income per Income-tax Act for a period. Deferred tax arises from timing differences between accounting income and taxable income that originate in one period but reverse in subsequent periods.
Timing differences originate in one period but reverse in one or more subsequent periods, these create deferred taxes. Permanent differences never reverse; they result from items included only in accounting or only in taxable income, so no deferred taxes arise from them.
A company may recognise a deferred tax asset on carry-forward business losses only when there is “virtual certainty” supported by convincing evidence that sufficient future taxable profits will be available to utilise those losses against future taxes.
MAT credit entitlement is recognised as an asset only when there is convincing evidence that normal income-tax liability will arise within the allowed carry-forward period. Disclosure must include expected utilisation period per ICAI’s Guidance Note on MAT Credit.
Entities must separately disclose current and deferred taxes in profit and loss, major components by nature, reconciliation where material deviations occur, evidence supporting DTA recognition for losses/unabsorbed depreciation, MAT credit entitlement details, and present DTAs/DTLs separately unless offsetting criteria are met.
Compute book depreciation per Companies Act and compare it with allowable depreciation per Income-tax Act. The difference creates a timing difference; multiply this by applicable enacted corporate tax rate to determine the deferred tax liability recognised during the year.
AS 22 uses an income-statement-based approach focused on timing differences. Ind AS 12 follows a balance-sheet-based approach using temporary differences. Recognition thresholds also differ, Ind AS requires probability; AS uses reasonable or virtual certainty depending on context.
Offset is permitted only if there is a legally enforceable right to set off amounts and an intention to settle net or realise assets/liabilities simultaneously. Otherwise, DTAs and DTLs must be presented separately as non-current items per Para 27 of AS 22.
Auditors frequently find errors such as recognising DTAs without sufficient evidence, applying wrong rates when measuring deferred taxes, failing to review recoverability each year, incorrectly recognising permanent difference effects, or inconsistent treatment/disclosure around MAT credits.
About This Article
Reviewed by CA & CS Team · Patron Accounting LLP
Technical reviewer: CA Sundram Gupta, FCA
Last reviewed: 2026-05-02
Sources: ICAI Compendium of Accounting Standards · MCA Notification (Companies (Accounting Standards) Rules, 2006 (reaffirmed in Companies (Accounting Standards) Rules, 2021)) · IFRS Foundation