Current Tax explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Three amounts paid to the income tax department, and none of them belongs on the tax line — one is a finance cost, one is interest, one is an ordinary expense.
The definition
Tax expense is to be disclosed on the face of the Statement of Profit and Loss and bifurcated into (1) Current tax and (2) Deferred tax.
The term "Current tax" has been defined under Ind AS 12 Income Taxes as the amount of income taxes payable (recoverable) in respect of the taxable profit (tax loss) for a period. Hence, details of all taxes on income payable under the applicable taxation laws should be disclosed here.
The operative words are taxes on income in respect of the taxable profit for a period. Anything paid to the tax authority that is not a tax on the period's income falls outside.
Interest on short payment of advance tax. Any interest on shortfall in payment of advance income-tax is in the nature of finance cost and hence should not be clubbed with "Current tax". The same should be classified as interest expense under finance costs. However, such amount should be separately disclosed.
The logic is that the entity has had the use of money it should have paid earlier. That is borrowing from the exchequer, and its cost is a financing cost — the same treatment an ordinary lender's interest would receive.
Compensatory penalties. Penalties which are compensatory in nature should be treated as interest and disclosed in the manner explained above — that is, as finance cost. A levy that is calculated by reference to time and amount is interest whatever it is called in the statute.
Other penalties. Other tax penalties should be classified under "Other Expenses". A penalty for concealment or for failure to comply is punitive, not compensatory; it is neither a tax on income nor a cost of money, so it goes to other expenses.
Why this matters: leaving these amounts inside current tax inflates the effective tax rate and understates finance costs and operating expenses. For an NBFC, where the finance cost line is central to reading the business, the distortion runs in the direction that most matters.
Prior year adjustments
Excess / short provision of tax relating to earlier years should be separately disclosed.
Such adjustments are current tax — they are taxes on income — but they relate to a different period's taxable profit. Separating them lets a reader compute a tax charge attributable to the current year's results, which is the figure any effective rate reconciliation depends on.
Deferred tax
Any charge or credit for deferred taxes needs to be disclosed separately on the face of the Statement of Profit and Loss. Ind AS 12 defines:
- Deferred tax liabilities — the amounts of income taxes payable in future periods in respect of taxable temporary differences;
- Deferred tax assets — the amounts of income taxes recoverable in future periods in respect of (a) deductible temporary differences; (b) the carry forward of unused tax losses; and (c) the carry forward of unused tax credits;
- Temporary differences — differences between the carrying amount of an asset or liability in the balance sheet and its tax base.
MAT credit follows limb (c)
Deferred tax asset is defined in Ind AS 12 to include the carry forward of unused tax credits. MAT Credits are in the form of unused tax credits that are carried forward by the company for a specified period of time.
Accordingly:
- MAT Credit Entitlement should be grouped with Deferred Tax Asset (net) in the Balance Sheet, with a separate note specifying the nature and amount of MAT Credit included as a part of deferred tax;
- MAT Credit Entitlement should be grouped with deferred tax in the Statement of Profit and Loss, with a separate note specifying the amount of MAT Credit;
- The company should review at each balance sheet date the reasonable certainty to recover deferred tax asset including MAT Credit Entitlement.
The recoverability review is the substantive requirement. A MAT credit is only an asset if the company will earn enough normal tax liability within the carry-forward period to use it.
Common mistakes
- Including interest on advance tax shortfall within current tax.
- Treating a punitive tax penalty as a finance cost.
- Combining prior year adjustments with the current year charge.
- Carrying MAT credit as an asset without the reasonable certainty review.