AS 22 prescribes accounting for taxes on income. The problem it addresses is that the profit shown in the financial statements (accounting income) is usually different from the profit on which tax is charged (taxable income), because tax law and accounting rules treat many items differently and on different timing. If a company simply recorded the tax it happened to pay for a year, its tax charge would not match its accounting profit, distorting the after-tax result. AS 22 solves this by recognising deferred tax so that the tax expense is matched with the accounting profit — using the timing difference (income statement) approach.
Objective and scope
The objective is to prescribe accounting treatment for taxes on income, based on the principle that taxes on income should be accounted for in the same period as the revenue and expenses to which they relate (the matching concept). Taxes on income include current tax and deferred tax. The standard applies to all enterprises in accounting for taxes on income.
The core concept — timing and permanent differences
AS 22 distinguishes between two kinds of differences between accounting income and taxable income:
Permanent differences are differences between taxable income and accounting income for a period that originate in one period and do not reverse subsequently. For example, an expense that is disallowed for tax purposes forever, or income that is permanently tax-exempt. Permanent differences do not give rise to deferred tax — they simply cause the effective tax rate to differ from the statutory rate.
Timing differences are differences between taxable income and accounting income for a period that originate in one period and are capable of reversal in one or more subsequent periods. For example, depreciation charged at different rates for accounting and tax, or an expense allowed for tax on a paid basis but recognised for accounting on an accrual basis. Timing differences are the source of deferred tax. Because they reverse over time, they represent tax effects that belong to the accounting periods to which the underlying items relate, even though the cash tax is paid in a different period.
This focus on timing differences — differences in the *income statement* between accounting and taxable income that originate and reverse — is what defines the AS 22 approach, and distinguishes it from the balance sheet approach of Ind AS 12.
Deferred tax — assets and liabilities
Deferred tax is the tax effect of timing differences. A deferred tax liability arises for timing differences that will result in taxable amounts in future periods (for example, where accounting depreciation is lower than tax depreciation now, so more will be taxable later). A deferred tax asset arises for timing differences that will result in deductible amounts in future periods (for example, an expense provided now but deductible for tax only when paid), and for the carryforward of unabsorbed depreciation and tax losses.
Deferred tax is measured using the tax rates and tax laws that have been enacted or substantively enacted by the balance sheet date. Deferred tax assets and liabilities are not discounted to present value.
Recognition and prudence for deferred tax assets
AS 22 applies particular prudence to the recognition of deferred tax assets. Deferred tax assets should be recognised and carried forward only to the extent that there is a reasonable certainty that sufficient future taxable income will be available against which such deferred tax assets can be realised. However, where a deferred tax asset arises from unabsorbed depreciation or carryforward of losses under tax laws, it is recognised only to the extent that there is virtual certainty supported by convincing evidence that sufficient future taxable income will be available. The higher "virtual certainty" threshold for losses and unabsorbed depreciation reflects the greater doubt that a loss-making enterprise will generate the future profits needed to use the asset. Deferred tax assets are reviewed at each balance sheet date and written down (or written up) to the extent it is no longer (or has become) reasonably/virtually certain that sufficient future taxable income will be available.
Presentation and disclosure
Current tax and deferred tax are recognised in the profit and loss account for the period (except to the extent that the tax relates to items recognised directly in reserves, in which case the tax is also adjusted against those reserves). Deferred tax assets and liabilities are presented separately from current tax assets and liabilities, and are shown after the head of "Investments" (broadly as a non-current item) in the balance sheet. The break-up of deferred tax assets and liabilities into their major components is disclosed, along with the nature of the evidence supporting the recognition of deferred tax assets arising from unabsorbed depreciation or losses.
A brief illustration
A company's accounting profit for the year is ₹100 lakh. It has charged accounting depreciation of ₹10 lakh, but tax depreciation is ₹15 lakh — a timing difference of ₹5 lakh (more is deductible for tax now, so more will be taxable later). It has also incurred ₹2 lakh of expenses permanently disallowed for tax (a permanent difference). Taxable income is ₹100 lakh + ₹2 lakh (permanent) − ₹5 lakh (extra tax depreciation) = ₹97 lakh, and at 25% the current tax is about ₹24.25 lakh. But the ₹5 lakh timing difference will reverse in future (when tax depreciation falls below accounting depreciation), creating future taxable amounts, so a deferred tax liability of ₹1.25 lakh (25% of ₹5 lakh) is recognised. The total tax expense — current plus deferred — is thus matched to the accounting profit, and the permanent difference simply makes the effective rate differ from 25%.
How AS 22 compares with Ind AS 12
This is a fundamental conceptual difference between the frameworks. AS 22 uses the timing difference (income statement) approach — it looks at differences between accounting income and taxable income that originate in one period and reverse in later periods. Ind AS 12, Income Taxes, uses the temporary difference (balance sheet) approach — it looks at differences between the carrying amounts of assets and liabilities in the balance sheet and their tax bases. The temporary difference approach is broader: it captures differences (such as those arising on revaluations, fair value adjustments, and business combinations) that never pass through the income statement and so are invisible to the timing difference approach. Ind AS 12 also recognises deferred tax on items taken to other comprehensive income and equity (backwards tracing), consistent with the OCI concept that does not exist under AS. In many routine cases the two approaches produce a similar deferred tax figure, but the conceptual basis differs and Ind AS 12 captures a wider set of differences. AS 22's dual recognition threshold for deferred tax assets (reasonable certainty generally; virtual certainty for losses/unabsorbed depreciation) is also more specific than the single "probable" test in Ind AS 12.
Common pitfalls
Recurring issues include recognising a deferred tax asset on carried-forward losses without virtual certainty supported by convincing evidence; treating a permanent difference as a timing difference (or vice versa); discounting deferred tax (which is not permitted); and failing to review deferred tax assets for continued recoverability at each balance sheet date.
Why this is cleaner on a unified system
Computing current and deferred tax accurately depends on reliable data about the items that differ between accounting and tax — depreciation, provisions, disallowances, and losses — which is far easier when the underlying records and the ledger sit in one connected system. When the figures that drive timing differences are maintained in a single source of truth, identifying and tracking those differences and computing the deferred tax is more reliable than reconciling tax computations against accounts held in separate tools. Where payroll and its associated tax items (such as provisions deductible only on payment) also flow through the same system, the timing differences they create are captured automatically.
This article is a detailed educational summary of AS 22 in plain language. It is not a substitute for the full text of the standard. Accounting standards are amended from time to time; always verify the current, authoritative text of AS 22 as issued by the ICAI before relying on it, and consult a qualified chartered accountant for application to your specific circumstances.