Deferred tax refers to the tax effect of temporary differences between accounting income that is calculated by taking into consideration the provisions of Companies Act, 2013 and taxable income that is calculated by taking into consideration the provisions of Income Tax Act,1961.
Temporary Differences:
While calculating taxable income, certain expenses debited to Profit or Loss A/c are disallowed in one period and gets reversed in future period in accordance with provisions of the Income-tax Act. In the same manner, certain incomes credited in one period to Profit or Loss A/c form part of the income in future period. Such items are considered as temporary differences.
For example:
(i) In case of treatment of deferred revenue expenditure (say, advertisement expenses incurred in one year but the benefit of which extends in subsequent years also), the expenditure incurred is amortised over a period of time but as per tax laws, it is allowed wholly in first year in which such deferred revenue expenditure is made.
(ii) In case of advance incomes received (say, advance rent), the disclosure of same is mandatory for the purpose of calculating taxable income. However, this income is recognized in the books of account when actually earned.
(iii) In case of different book and tax depreciation which could arise due to difference in depreciation rates or methods of calculating depreciation i.e. SLM or WDV or differences in composition of actual cost of assets.
(iv) In case of provisions made in anticipation of liabilities where the liability is allowed in the subsequent period when it crystalizes.
Deferred Tax Accounting:
The accounting, presentation and disclosure of deferred tax is carried out as per the provisions of “Accounting Standard- 22” (i.e., Accounting for Taxes on Income) or “Ind AS- 12” (i.e., Income Taxes). Deferred tax asset or deferred tax liability is created by debiting/crediting Statement of Profit and Loss.
The following table shows different cases where deferred tax asset/ liability is required to be created:
| CASES | DEFERRED TAX ASSET/ LIABILITY |
| Book Profit > Taxable Profit | Deferred Tax Liability (DTL) |
| Book Profit < Taxable Profit | Deferred Tax Asset (DTA) |
Deferred Tax Asset/ liability in case of LOSS:
Due to differences in income as per financial books and taxable profit as per tax laws, there is a certainty that one book reflects loss and other shows profit. In that case, the following treatment shall be made:
| CASES | DEFERRED TAX ASSET/ LIABILITY |
| Loss as per books of accounts and Profit as per tax laws (Subject to the principles of prudence) | Deferred Tax Asset (DTA) |
| Loss as per tax laws and Profit as per books of account (MAT has to be paid) | Deferred Tax Liability (DTL) |
Deferred Tax Computation Rate:
The deferred tax asset/liability is calculated at the normal rate of tax.
Deferred Tax Asset Accounting:
Deferred Tax Asset (DTA) account is created by crediting Profit & Loss Account. The following journal entry is required to be passed.
Deferred Tax Asset A/C……………. Dr
To Profit & Loss A/C……………………..….
Deferred Tax Liability Accounting:
Deferred Tax Liability (DTL) account is created by crediting Profit & Loss Account. The following journal entry is required to be passed.
Profit & Loss A/C ……………. Dr
To Deferred Tax Liability A/C ………..…….