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IAI Actuarial Core Principles · Business Finance · Personal and corporate taxation

A company in India wants to compute its taxable business profit for a year. Which of the following is the correct starting point and treatment for depreciation under the usual approach taught at this level?

Taxable profit starts from accounting profit, adds back accounting depreciation because tax rules do not accept it, and then deducts the tax-allowable depreciation or capital allowances. This replaces the company's own depreciation charge with the tax system's version.

  1. AStart with accounting profit, add back accounting depreciation, and deduct tax-allowable depreciation (capital allowances)Correct
  2. BStart with accounting profit and deduct accounting depreciation again, since it is a business expense
  3. CStart with turnover and deduct only cash expenses, ignoring all depreciation
  4. DStart with accounting profit and add back tax-allowable depreciation only
  5. Start with accounting profit and make no adjustment for depreciation because tax follows the accounts exactly

Explanation

Accounting depreciation is a non-cash charge set by the company's policy and is not accepted for tax. It is added back to accounting profit, and the tax-allowed depreciation is deducted instead. Deducting it again would double count, and ignoring the adjustment would assume tax follows the accounts, which it does not.

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