Financial Accounting · Accounting for Taxes on Income (AS 22)

AS 22 Objectives, Scope and Key Definitions Explained

Updated 10 October 2026 · Fact-checked

AS 22 prescribes how to account for taxes on income. It applies the matching concept, so tax is accrued in the same period as the revenue and expenses it relates to. Compute current tax on taxable income, find timing differences between accounting and taxable income, and recognise deferred tax on those differences only.

Understand AS 22 Objectives, Scope and Key Definitions

Every company keeps two sets of profit figures. Accounting income is the profit shown in the statement of profit and loss, worked out under accounting policies. Taxable income is calculated in accordance with tax laws. The two often differ, because tax laws and accounting rules treat some items differently.

AS 22 explains why they differ. First, some items of revenue and expense in the books are not treated as revenue, expense or deduction for tax. Second, the amount of an item in the books may differ from the amount allowed for tax. The objective of the Standard is to prescribe the accounting treatment for taxes on income. Under the matching concept, taxes on income are accrued in the same period as the revenue and expenses to which they relate.

Scope: the Standard is applied in accounting for taxes on income. This covers working out the expense or saving related to taxes on income for an accounting period, and disclosing that amount in the financial statements. Taxes on income include all domestic and foreign taxes which are based on taxable income.

The differences fall into two types. A timing difference originates in one period and is capable of reversal in one or more later periods. Example: tax allows WDV depreciation while the books use straight line. Over the asset's life the total is the same, only the periods differ. A permanent difference originates in one period and does not reverse later. Example: tax law allows only part of an expenditure, so the disallowed part is a permanent difference.

Current tax is the income tax determined to be payable (recoverable) on the taxable income (tax loss) for a period. Deferred tax is the tax effect of timing differences. Only timing differences create deferred tax. Permanent differences do not. Unabsorbed depreciation and carried-forward losses that can be set off against future taxable income are also timing differences and can give deferred tax assets, subject to prudence.

Key rules to remember

Tax expense: Tax expense = Current tax + Deferred tax; Deferred tax is the tax effect of timing differences. It can be a charge or a credit for the year.
Deferred tax for the year: Deferred tax = Tax rate × (Originating timing differences − Reversing timing differences); This follows the layout of Illustration 1 in the Standard. A negative result is a credit.
Timing difference: Originates in one period and is capable of reversal in later periods; Gives rise to deferred tax. Example: WDV tax depreciation versus straight-line book depreciation.
Permanent difference: Originates in one period and does not reverse subsequently; No deferred tax. Example: the disallowed part of an expenditure.
Current tax: Current tax = Tax rate × Taxable income; Taxable income is computed under tax laws, not from accounting profit directly.

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

Use this method for any question that asks you to define, classify or compute under AS 22.

1Write the starting figures: accounting income (profit before tax) and, if given, taxable income.
2List each item that makes the two differ.
3Classify each item: will it reverse in a later period? If yes, it is a timing difference. If no, it is a permanent difference.
4Ignore permanent differences for deferred tax. They affect current tax only, through taxable income.
5Compute current tax as tax rate × taxable income.
6Compute deferred tax as tax rate × (originating − reversing timing differences). Show whether it is a liability or an asset.
7Add current tax and deferred tax to get tax expense, then give the journal entry if asked.
8Where the question asks for theory, quote the definition in the Standard's words and add one example.

Quickest way: Reverse or not: the two-question test

When to use it: Use it for MCQs and for classification questions where you must label each item quickly.

Ask: will the total effect on income be the same over the asset's or item's life? If yes, only the timing differs, so it is a timing difference.
Ask: is part of the item never allowed or never taxed? If yes, it is permanent.
Timing difference means deferred tax. Permanent means none.
For tax expense, remember it equals current tax plus deferred tax, so it follows accounting income.

Common mistakes in AS 22 Objectives, Scope and Key Definitions

Treating every difference between accounting and taxable income as giving deferred tax.
Students remember that profits differ and forget the reversal test.
Fix: Create deferred tax only for timing differences. Permanent differences never reverse, so they give none.
Defining deferred tax as tax payable for the year.
Confusion with current tax.
Fix: Current tax is the income tax payable (recoverable) on taxable income. Deferred tax is the tax effect of timing differences.
Calling the tax effect rather than the difference itself the timing difference.
The terms are used loosely in class.
Fix: The timing difference is the difference in income. Deferred tax is its tax effect: rate × difference.
Computing current tax on accounting profit.
Students use the profit before tax from the books by habit.
Fix: Current tax is based on taxable income, calculated in accordance with tax laws.
Forgetting that carried-forward losses and unabsorbed depreciation are timing differences.
They do not look like depreciation-type items.
Fix: Remember they are timing differences that can give deferred tax assets, subject to prudence.

Worked examples

Example 1

Classify each item as a timing or permanent difference under AS 22: (a) Tax allows WDV depreciation on machinery; the books use straight line. (b) Tax law allows only part of an expenditure as deduction; the rest is disallowed.

Show the solution

Item (a): total depreciation charged in the books and allowed for tax will ultimately be the same over the life. Only the periods differ.
So the difference originates in one period and reverses later. It is a timing difference.
Item (b): the disallowed amount is never allowed in any later period.
So it originates and does not reverse. It is a permanent difference.

Answer: (a) Timing difference, so deferred tax arises. (b) Permanent difference, so no deferred tax arises.

Example 2

A company buys a machine for ₹1,50,000 on 1 April. Life is 3 years, scrap nil. Straight-line depreciation is used in the books. Tax allows 100% in year 1. Profit before depreciation and tax is ₹2,00,000 each year; tax rate is 40%. Find current tax, deferred tax and tax expense for year 1 and year 2.

Show the solution

Book depreciation = ₹1,50,000 ÷ 3 = ₹50,000 a year. Accounting income = ₹2,00,000 − ₹50,000 = ₹1,50,000.
Year 1 taxable income = ₹2,00,000 − ₹1,50,000 = ₹50,000. Current tax = 40% × ₹50,000 = ₹20,000.
Year 1 originating timing difference = ₹1,50,000 − ₹50,000 = ₹1,00,000. Deferred tax = 40% × ₹1,00,000 = ₹40,000 (liability).
Year 1 tax expense = ₹20,000 + ₹40,000 = ₹60,000 (40% of ₹1,50,000).
Year 2 taxable income = ₹2,00,000 (no tax depreciation left). Current tax = 40% × ₹2,00,000 = ₹80,000.
Year 2 reversing difference = ₹50,000 (book depreciation). Deferred tax = 40% × ₹50,000 = ₹20,000 credit, reducing the liability to ₹20,000.
Year 2 tax expense = ₹80,000 − ₹20,000 = ₹60,000.

Answer: Year 1: current tax ₹20,000, deferred tax ₹40,000, tax expense ₹60,000. Year 2: current tax ₹80,000, deferred tax credit ₹20,000, tax expense ₹60,000.

Exam tips

Learn the definitions of timing and permanent differences word for word. They are common short-answer and MCQ material.
For classification questions, always add the reason: reverses or does not reverse.
In numerical answers, show current tax, deferred tax and tax expense on separate lines for step marks.
Check that tax expense equals tax rate × accounting income when only timing differences exist. It is a quick self-check.
In theory answers, state the scope: taxes on income include all domestic and foreign taxes based on taxable income.

Practice questions from Accounting for Taxes on Income (AS 22)

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

What is the objective of AS 22?

AS 22 prescribes the accounting treatment for taxes on income. Following the matching concept, taxes on income are accrued in the same period as the revenue and expenses to which they relate.

What is the difference between a timing difference and a permanent difference?

A timing difference originates in one period and is capable of reversal in later periods. A permanent difference originates in one period and does not reverse. Only timing differences give rise to deferred tax.

What is the difference between accounting income and taxable income?

Accounting income is the profit shown in the statement of profit and loss. Taxable income is calculated in accordance with tax laws. They differ because the two sets of rules treat some items differently.

What taxes are covered by AS 22?

Taxes on income include all domestic and foreign taxes which are based on taxable income.