Corporate Financial Reporting · Income Taxes (Ind AS 12)

Ind AS 12 Scope, Definitions and Key Concepts for CMA Final

Updated 11 October 2026 · Fact-checked

Ind AS 12 applies to accounting for income taxes. Accounting profit is profit before tax expense; taxable profit follows tax law. A temporary difference is the gap between an asset's or liability's carrying amount and its tax base. Compute the tax base, compare, then classify the difference as taxable or deductible.

Understand Ind AS 12 Scope, Definitions and Key Concepts

Ind AS 12 says it "shall be applied in accounting for income taxes". It does not set methods for government grants or investment tax credits (see Ind AS 20), but it does cover the temporary differences that arise from them.

Two profits matter. Accounting profit is profit or loss for a period before deducting tax expense. Taxable profit is the profit on which tax is payable, worked out under tax law. They differ because books and tax law recognise some income and expenses in different ways or in different periods.

The tax base of an asset or liability is the amount attributed to it for tax purposes. For a depreciable asset, the tax base is the original cost less all deductions permitted under tax law in current and prior periods. Some items, such as preliminary expenses, have a tax base even though they are not in the balance sheet.

Temporary differences are differences between the carrying amount of an asset or liability and its tax base. They are of two kinds. A taxable temporary difference will result in taxable amounts in future periods when the carrying amount is recovered or settled. It gives a deferred tax liability. A deductible temporary difference will result in deductible amounts in future periods. It gives a deferred tax asset, subject to recognition conditions.

A permanent difference is one that never reverses, for example an expense that tax law never allows as a deduction. It creates no deferred tax because no future tax effect follows. Ind AS 12 itself works with temporary differences, so the idea of a permanent difference is the contrast you use to decide what is left out.

Key rules to remember

Temporary difference: Temporary difference = Carrying amount − Tax base; For an asset, a positive result is a taxable temporary difference and a negative result is deductible. For a liability, the logic is reversed.
Tax base of a depreciable asset: Tax base = Original cost − Cumulative tax deductions allowed; This is the wording of paragraph 17(b), so use tax depreciation, not book depreciation.
Deferred tax liability (DTL): DTL = Taxable temporary difference × Tax rate; Para 15 requires a DTL for all taxable temporary differences, except goodwill initial recognition and certain initial recognitions that are not business combinations and affect neither profit.
Deferred tax asset (DTA): DTA = Deductible temporary difference × Tax rate; Recognised only if it is probable that sufficient taxable profit will be available to use the benefit.
Tax base of a liability: Tax base = Carrying amount − Amount deductible for tax in future periods; For a provision that is deductible only when paid, the tax base is nil.

How to solve Ind AS 12 Scope, Definitions and Key Concepts questions

Use this order for any question on scope, definitions or identifying temporary differences.

1Check the item is an income tax matter under Ind AS 12. Grants and investment tax credits are outside its methods, but their temporary differences are inside.
2Write the carrying amount of the asset or liability from the balance sheet.
3Work out the tax base. For assets: cost less tax deductions allowed so far. For liabilities: carrying amount less future tax deductions.
4Compare the two and find the difference.
5Ask whether the difference will reverse. If it never reverses, it is permanent and creates no deferred tax.
6Classify a reversing difference as taxable (DTL) or deductible (DTA).
7Multiply by the tax rate given in the question.
8Check recognition exceptions (goodwill, para 15(b)) and, for a DTA, the probability of future taxable profit.

Quickest way: Carrying amount versus tax base grid

When to use it: Use for MCQs and short classification questions where you must label a difference quickly.

For an asset: carrying amount above tax base means taxable difference and DTL; below means deductible difference and DTA.
For a liability: carrying amount above tax base means deductible difference and DTA.
If tax depreciation is faster than book depreciation, expect a DTL.
If an expense is booked now but deductible only when paid, expect a DTA.
If the item is never deductible or never taxable, call it permanent and stop.

Common mistakes in Ind AS 12 Scope, Definitions and Key Concepts

Treating all differences between accounting profit and taxable profit as temporary differences.
Students link every reconciliation item to deferred tax.
Fix: Ask if the item reverses. Items never allowed or never taxed are permanent and give no deferred tax.
Using book depreciation to compute the tax base.
The carrying amount and tax base look alike and get mixed up.
Fix: Tax base is cost less cumulative deductions allowed under tax law. Carrying amount is cost less book depreciation.
Applying the tax rate to the carrying amount or the tax base instead of the difference.
Rushing the last step.
Fix: Deferred tax is the temporary difference times the rate. The Ind AS 12 example uses Rs. 40 at 25% to get Rs. 10.
Mixing up DTL and DTA for liabilities.
Students apply the asset rule to a provision.
Fix: A provision with tax base nil gives a deductible difference and a DTA, as in the gratuity example.
Ignoring the recognition limits.
Students stop at the computation.
Fix: Check the goodwill exception and for a DTA confirm that future taxable profit is probable.

Worked examples

Example 1

An asset cost Rs. 150 and has a carrying amount of Rs. 100. Cumulative tax depreciation is Rs. 90. The tax rate is 25%. Find the tax base, the temporary difference and the deferred tax.

Show the solution

Tax base = 150 − 90 = Rs. 60.
Temporary difference = 100 − 60 = Rs. 40.
Carrying amount exceeds tax base, so it is a taxable temporary difference.
DTL = 40 × 25% = Rs. 10.

Answer: Tax base Rs. 60; taxable temporary difference Rs. 40; deferred tax liability Rs. 10.

Example 2

An entity provides Rs. 100 for gratuity and leave encashment. Tax law allows the deduction only on payment. The tax rate is 25%. Identify the difference and the deferred tax.

Show the solution

Carrying amount of the liability is Rs. 100.
Future deduction is Rs. 100, so tax base = 100 − 100 = nil.
Difference = 100 − 0 = Rs. 100, a deductible temporary difference.
DTA = 100 × 25% = Rs. 25.
Recognise it only if sufficient future taxable profit is probable.

Answer: Deductible temporary difference Rs. 100; deferred tax asset Rs. 25, subject to probable future taxable profit.

Exam tips

Show the tax base working in a separate line. Marks are often given for it.
State the classification (taxable or deductible) in words, not only the number.
Quote the para 15 exceptions when goodwill appears in a case.
Use the rate given in the question and say so.
Label items as permanent when they never reverse, and exclude them from deferred tax.

Practice questions from Income Taxes (Ind AS 12)

Ind AS 12 Scope, Definitions and Key Concepts in other exams

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

CA FinalInd AS 12 Scope, Definitions and Current Tax

Ind AS 12 Scope, Definitions and Key Concepts: frequently asked questions

What is the difference between accounting profit and taxable profit?

Accounting profit is profit or loss before deducting tax expense, under Ind AS. Taxable profit is computed under tax law. The gap arises from timing differences and from items that are never taxed or never allowed.

What is a tax base?

It is the amount attributed to an asset or liability for tax purposes. For a depreciable asset it is cost less all tax deductions allowed so far. For a liability it is the carrying amount less amounts deductible in future.

Are permanent differences covered by deferred tax?

No. Deferred tax arises from temporary differences that reverse. A permanent difference never reverses, so it has no future tax effect and gives no deferred tax.

When does a temporary difference give a deferred tax liability?

When it is a taxable temporary difference. For example, when tax depreciation is faster than book depreciation, the carrying amount exceeds the tax base. Ind AS 12 requires a DTL for all such differences, except in the para 15 cases.