CMA Intermediate · Financial Accounting · Accounting for Taxes on Income (AS 22)
A company expects future taxable income of Rs. 10 lakhs, of which the first Rs. 4 lakhs is taxed at 20% and the balance at 30%. A timing difference of Rs. 2 lakhs is expected to reverse in that period. Following AS 22 on differing rates for different income levels, what deferred tax liability should be recognised?
The deferred tax liability is Rs. 0.52 lakh. AS 22 requires average rates where different rates apply to different income levels. Tax on Rs. 10 lakhs is Rs. 2.6 lakhs, an average of 26%, and 26% of the Rs. 2 lakh timing difference gives the liability.
- ARs. 0.40 lakh
- BRs. 0.50 lakh
- CRs. 0.60 lakh
- DRs. 0.52 lakhCorrect
Explanation
Expected tax = 4 x 20% + 6 x 30% = 0.8 + 1.8 = Rs. 2.6 lakhs, so the average rate is 2.6/10 = 26%. Deferred tax = 26% x 2 = Rs. 0.52 lakh. Using the 30% marginal rate gives 0.60, 20% gives 0.40, and a simple average of 25% gives 0.50, all of which contradict the average-rate rule.
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