Advanced Accounting · AS 22 Accounting for Taxes on Income

AS 22 Introduction, Scope and Key Definitions for CA Inter

Updated 4 October 2026 · Fact-checked

AS 22 tells you how to account for income tax in the books when accounting profit and taxable profit differ. You compute current tax on taxable income, then deferred tax on timing differences only. Permanent differences create no deferred tax. Learn the definitions first; the sums follow from them.

Understand AS 22 Introduction, Scope and Key Definitions

Companies keep books under accounting rules. They file tax returns under tax law. The two sets of rules do not match, so accounting income (profit before tax in the statement of profit and loss) and taxable income (income on which tax is payable under tax law) usually differ.

AS 22 deals with this gap. Its objective is to prescribe how to account for taxes on income. The core idea is matching: tax expense of a period should relate to the accounting income of that same period. Tax paid under the return may not do that, because some items are taxed in a different period from the one in which they are booked.

The standard splits the tax charge into two parts. Current tax is the amount of income tax determined to be payable (or recoverable) for a period, calculated on taxable income. Deferred tax is the tax effect of timing differences. Tax expense = current tax + deferred tax.

A timing difference arises when an item is recognised in one period for accounting and in a different period for tax, and it reverses in one or more later periods. Depreciation is the classic case: the book charge and the tax allowance differ in a year, but over the asset's life the total is the same. A permanent difference arises in one period and does not reverse later, for example an expense that tax law never allows, or income that is exempt. It affects only the current tax and creates no deferred tax.

Scope: AS 22 applies to accounting for all taxes based on income. This includes domestic and foreign taxes based on taxable income. It also includes withholding taxes payable by an investee, subsidiary, associate or joint venture on distributions to the reporting enterprise. The standard does not specify the accounting for the tax effects of government grants or investment tax credits.

Recognition of deferred tax assets needs a level of certainty, and the level depends on the item. A deferred tax asset on unabsorbed depreciation or carried-forward losses is recognised only where there is virtual certainty, supported by convincing evidence, that sufficient future taxable income will be available against which the asset can be realised. A deferred tax asset on other timing differences is recognised only where there is reasonable certainty of such future taxable income.

There is a relaxation for small and medium-sized companies (SMCs). For an SMC, a deferred tax asset on unabsorbed depreciation and carried-forward losses needs only reasonable certainty that sufficient future taxable income will be available. The stricter test of virtual certainty supported by convincing evidence does not apply to an SMC. All other companies must meet the virtual certainty test for these two items.

Key rules to remember

Tax expense: Tax expense = Current tax + Deferred tax; Deferred tax can be a charge (liability increase or asset decrease) or a credit. Current tax is on taxable income.
Current tax: Current tax = Taxable income × Tax rate; Use the tax rate that applies to the period, including any applicable surcharge and cess if the question includes them.
Taxable income from accounting income: Taxable income = Accounting income + Disallowed expenses (permanent) − Exempt income (permanent) + Timing differences that make taxable income higher − Timing differences that make taxable income lower; Add timing differences that raise taxable income in the year they originate (for example, provisions disallowed until paid). Deduct those that lower it (for example, tax depreciation higher than book depreciation). Reversals work the opposite way: a reversal of an item that earlier raised taxable income now lowers it, and vice versa.
Deferred tax for the year: Deferred tax = (Originating timing differences − Reversing timing differences) × Enacted or substantively enacted tax rate; This is the tax effect of the net originating timing difference for the year. If the net difference makes taxable income lower than accounting income (for example, tax depreciation higher than book depreciation), it is a deferred tax liability (DTL). If it makes taxable income higher (for example, a provision disallowed until paid), it is a deferred tax asset (DTA), recognised only if the AS 22 certainty condition is met. If reversals exceed originations, the net amount reverses an earlier DTL or DTA.
Type of difference test: Reverses in later periods → timing difference. Never reverses → permanent difference.; Only timing differences give deferred tax. Permanent differences give none.

How to solve AS 22 Introduction, Scope and Key Definitions questions

Use this order for any question on definitions, classification or a basic reconciliation of accounting and taxable income.

1Write down accounting income (profit before tax) from the question.
2List every item that differs between books and tax law.
3For each item ask: will it reverse in a later period? If yes, it is a timing difference; if no, it is permanent.
4Adjust accounting income for permanent differences and for the year's timing differences to reach taxable income. Add timing differences that raise taxable income and deduct those that lower it.
5Compute current tax as taxable income × the given tax rate.
6Compute deferred tax only on the timing differences, using the given tax rate, and decide whether it is a liability or asset.
7Add current tax and deferred tax for the tax expense, and show the working in a neat table.
8State the reasoning in one line for each classification, because step marks are given for it.

Quickest way: Classify, adjust, tax

When to use it: Use this for MCQs and for short written reconciliations when time is tight.

MCQs: ask only one question. Does the item reverse later? Yes means timing difference, no means permanent difference.
Remember the standard examples: depreciation differences, expenses allowed on payment basis, and provisions disallowed until paid are timing; penalties, fines and exempt income are permanent.
In a sum, set up three columns: item, effect on taxable income, timing or permanent.
Apply the rate to taxable income for current tax and to timing differences for deferred tax.
Written answers: write the formula, then the working, then one line of interpretation. This earns step marks even if a figure slips.

Common mistakes in AS 22 Introduction, Scope and Key Definitions

Creating deferred tax on permanent differences.
Students see any difference between accounting and taxable income and assume deferred tax is needed.
Fix: Deferred tax arises only from timing differences. Disallowed penalties and exempt income never reverse, so ignore them for deferred tax.
Confusing accounting income with taxable income.
Both are called profit, and the question may simply say 'profit'.
Fix: Accounting income is the book profit before tax. Taxable income is computed under tax law. Always state which one you are using.
Calling a difference temporary just because it affects one year only.
Students look at the year of origin and ignore reversal.
Fix: The test is reversal in later periods. If the item never gets reversed, it is permanent however small it is.
Computing current tax on accounting income.
Students apply the rate to book profit to save time.
Fix: Current tax is always on taxable income. Adjust the book profit first.
Treating tax expense as only the tax paid.
Students forget that the P&L charge includes deferred tax.
Fix: Tax expense in the statement of profit and loss = current tax + deferred tax.

Worked examples

Example 1

A company has accounting income of ₹10,00,000 for the year. It includes ₹50,000 of penalty paid for a legal breach, which is not allowed as a deduction under tax law. Book depreciation is ₹3,00,000 and tax depreciation is ₹4,00,000. Tax rate is 30%. Classify the differences and compute current tax, deferred tax and tax expense.

Show the solution

Penalty ₹50,000 is never allowed in any year, so it is a permanent difference. It is added back and creates no deferred tax.
Depreciation differs by ₹1,00,000 (tax ₹4,00,000 − book ₹3,00,000). It reverses over the asset's life, so it is a timing difference.
Taxable income = ₹10,00,000 + ₹50,000 (penalty) − ₹1,00,000 (extra tax depreciation) = ₹9,50,000.
Current tax = ₹9,50,000 × 30% = ₹2,85,000.
Deferred tax = ₹1,00,000 × 30% = ₹30,000. Tax depreciation exceeds book depreciation, so taxable income is lower now and higher later. This is a deferred tax liability (a charge).
Tax expense = ₹2,85,000 + ₹30,000 = ₹3,15,000.

Answer: Penalty is permanent; depreciation is timing. Taxable income ₹9,50,000; current tax ₹2,85,000; deferred tax liability created ₹30,000; tax expense ₹3,15,000.

Example 2

Distinguish timing differences from permanent differences, and classify these items: (a) dividend income exempt from tax, (b) a provision for warranty expense that tax law allows only when actually paid, (c) donation not allowed as deduction.

Show the solution

A timing difference originates in one period and reverses in one or more later periods. It gives rise to deferred tax. A permanent difference originates in one period and does not reverse later, so no deferred tax arises.
(a) Exempt dividend income is never taxed in any period. It is a permanent difference.
(b) The warranty provision is charged in the books now but allowed for tax only when paid in a later period. It reverses, so it is a timing difference. Taxable income is higher now and lower later.
(c) A donation that is not allowed as a deduction in any year never reverses. It is a permanent difference.

Answer: (a) Permanent. (b) Timing, giving rise to a deferred tax asset (subject to AS 22 recognition conditions). (c) Permanent.

Exam tips

Expect a short question such as 'distinguish timing and permanent differences' with examples. Give a definition, the reversal test and two examples each.
In MCQs, always read whether the question asks for current tax, deferred tax or total tax expense. Examiners use that confusion.
In reconciliations, show taxable income step by step with each adjustment labelled. A wrong figure still earns step marks.
Learn the definitions as given in AS 22 for accounting income, taxable income, current tax and deferred tax. Definition questions are easy marks.
Use the rate given in the question. Do not add surcharge or cess unless the question tells you to.

Practice questions from AS 22 Accounting for Taxes on Income

AS 22 Introduction, Scope and Key Definitions in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

AS 22 Introduction, Scope and Key Definitions: frequently asked questions

What is the main objective of AS 22?

It prescribes how to account for taxes on income so that the tax expense is matched with the accounting income of the period. It does this by recognising deferred tax on timing differences in addition to current tax.

What is the difference between accounting income and taxable income?

Accounting income is the profit before tax in the statement of profit and loss, prepared under accounting standards. Taxable income is the income on which tax is payable, computed under tax law. They differ because the rules for recognising income and expenses differ.

How do I tell a timing difference from a permanent difference?

Ask whether the difference reverses in a later period. If it does, it is a timing difference and gives deferred tax. If it never reverses, it is permanent and affects only current tax.

Does deferred tax arise on all differences between books and tax?

No. Deferred tax arises only on timing differences. Permanent differences such as disallowed penalties or exempt income create no deferred tax.