Ind AS 12 prescribes the accounting treatment for income taxes — both the tax currently payable and deferred tax, which arises because the way items are treated for accounting differs from the way they are treated for tax. The standard's defining feature is the balance sheet approach (also called the temporary difference approach), which is conceptually different from the income-statement approach used by the corresponding AS standard, AS 22.
Objective and scope
The objective is to prescribe the accounting treatment for income taxes, including how to account for the current and future tax consequences of the future recovery (settlement) of the carrying amount of assets (liabilities) recognised in the balance sheet, and of transactions and other events of the current period recognised in the financial statements. Income taxes include all domestic and foreign taxes based on taxable profits.
Current tax
Current tax is the amount of income taxes payable (recoverable) in respect of the taxable profit (tax loss) for a period. Current tax for the current and prior periods is recognised as a liability to the extent unpaid, or as an asset to the extent the amounts paid exceed the amount due. The benefit of a tax loss that can be carried back to recover current tax of a previous period is recognised as an asset. Current tax is measured using the tax rates and laws enacted or substantively enacted by the end of the reporting period.
The core concept — temporary differences
The heart of Ind AS 12 is the temporary difference: a difference between the carrying amount of an asset or liability in the balance sheet and its tax base (the amount attributed to that asset or liability for tax purposes). Temporary differences are of two kinds:
Taxable temporary differences result in taxable amounts in future periods when the carrying amount of the asset is recovered or the liability settled — these give rise to deferred tax liabilities.
Deductible temporary differences result in amounts deductible in future periods — these give rise to deferred tax assets.
The balance sheet approach focuses on these differences in carrying amounts versus tax bases, rather than on differences between accounting income and taxable income for the period (the income statement approach of AS 22). The two approaches often produce similar results, but the balance sheet approach captures a wider range of temporary differences — for example, those arising on revaluations, fair value adjustments, and business combinations — that a pure timing-difference approach may miss.
Deferred tax liabilities and assets
A deferred tax liability is recognised for all taxable temporary differences, with limited exceptions (such as the initial recognition of goodwill, and certain initial recognition exemptions). A deferred tax asset is recognised for all deductible temporary differences, and for the carryforward of unused tax losses and unused tax credits, to the extent that it is probable that future taxable profit will be available against which they can be utilised. This recognition test for deferred tax assets — probability of future taxable profit — is important: an asset is not recognised if its recovery is not probable.
Deferred tax is measured at the tax rates expected to apply in the period when the asset is realised or the liability settled, based on rates enacted or substantively enacted by the end of the reporting period. Deferred tax assets and liabilities are not discounted.
Recognition — where the tax effect goes
The current and deferred tax consequences follow the item to which they relate. Tax relating to items recognised in profit or loss is recognised in profit or loss. Tax relating to items recognised in other comprehensive income (such as a revaluation of PPE or remeasurement of a defined benefit plan) is recognised in OCI. Tax relating to items recognised directly in equity is recognised in equity. This "backwards tracing" — putting the tax effect in the same place as the underlying item — is a feature of Ind AS 12 connected to the existence of OCI under Ind AS.
Presentation and disclosure
Deferred tax assets and liabilities are presented as non-current. Current tax assets and liabilities are offset, and deferred tax assets and liabilities are offset, only where specified conditions are met. Disclosures are extensive: the major components of tax expense, a reconciliation between tax expense and the product of accounting profit and the applicable tax rate (the effective tax rate reconciliation), the amounts of deductible temporary differences and unused tax losses for which no deferred tax asset is recognised, and the nature of the evidence supporting recognition of deferred tax assets where utilisation depends on future profits.
A brief illustration
A company has a machine with a carrying amount of ₹100 lakh but a tax base (tax written-down value) of ₹70 lakh, because tax depreciation has been faster than accounting depreciation. The ₹30 lakh excess is a taxable temporary difference — when the asset's carrying amount is recovered, ₹30 lakh more will be taxable than is deductible. At a 25% tax rate, the company recognises a deferred tax liability of ₹7.5 lakh. Conversely, if the company has a provision of ₹20 lakh that is deductible for tax only when paid (a deductible temporary difference), and it is probable there will be future taxable profit, it recognises a deferred tax asset of ₹5 lakh. The balance sheet approach identifies these from the carrying-amount-versus-tax-base comparison.
How Ind AS 12 compares with AS 22
This is one of the more conceptually significant differences between the frameworks. AS 22 uses the income statement (timing difference) approach — it looks at differences between accounting income and taxable income that originate in one period and reverse in later periods. Ind AS 12 uses the balance sheet (temporary difference) approach — it looks at differences between the carrying amounts of assets and liabilities and their tax bases. The temporary difference approach is broader: it captures differences (such as those on revaluations, fair value measurements, and business combinations) that the timing difference approach does not. Ind AS 12 also recognises deferred tax on items in OCI and equity (backwards tracing), reflecting the OCI concept that does not exist under AS. In many straightforward cases the deferred tax outcome is similar, but the conceptual basis and the breadth of differences captured differ.
Common pitfalls
Frequent issues include recognising a deferred tax asset without sufficient evidence that future taxable profit is probable; discounting deferred tax (which is not permitted); recognising tax in profit or loss when the underlying item is in OCI or equity; and failing to identify temporary differences arising on revaluations or fair value adjustments that the balance sheet approach captures.
Why this is cleaner on a unified system
Computing current and deferred tax accurately depends on reliable carrying amounts and tax bases for every asset and liability — which is far easier when the fixed asset register, provisions, and the ledger all sit in one connected system. When the carrying amounts that drive temporary differences are maintained in a single source of truth, identifying differences against their tax bases and tracking deferred tax is more reliable than reconciling figures across separate tools.
This article is a detailed educational summary of Ind AS 12 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 Ind AS 12 as notified under the Companies Act before relying on it, and consult a qualified chartered accountant for application to your specific circumstances.