Deferred Tax Liability (DTL) or Deferred Tax Asset (DTA) item forms an important part of your Financial Statements. 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. This adjustment made at year-end closing of Books of Accounts affects the Income-tax outgo of your Business for that year as well as the years ahead.

Situations under which deferred tax can arise

Permanent differences
If an item in the profit and loss account is never chargeable or allowable for tax or is chargeable or allowable for tax purposes but never appears in the profit and loss account then this is a permanent difference. A permanent difference does not give rise to deferred tax.

Examples of Permanent differences
Fines and Penalties-Fines and penalties are debited to profit and loss account but are never allowed under the provisions of Income Tax Act 1961 which leads a permanent difference in profit as per books of account and Income tax.

Temporary Differences
If items are chargeable or allowable for tax purposes but in different periods to when the income or expense is recognised in the books of accounts, then this gives rise to 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.  

Examples of Temporary differences
Depreciation-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 may lead to create DTA or DTL.

Deferred Revenue Expenditure-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

Whether MAT credit can be considered as a deferred tax asset per AS 22?
As per Ind AS 22 deferred tax asset and liability arise due to the difference between book income & taxable income and do not rise on account of tax expense itself. MAT does not give rise to any difference between book income and taxable income. It is not appropriate to consider MAT credit as a deferred tax asset in accordance with AS 22.

These deferred taxes are given effect to in the financial statements through Deferred Tax Asset and Liability as under:

Sl.No                                                                 Entity Profit Status    Entity – Current Entity – Future       Effect
1 Book profit higher than the Taxab`le profit     Pay less tax now      Pay more tax in future                     Creates Deferred Tax Liability (DTL)
2 Book profit is less than the Taxable profit      Pay more tax now     Pay less tax in future                      Creates Deferred Tax Asset (DTA)

 

With respect to timing differences related to unabsorbed depreciation or carry forward losses, DTA is recognised only if there is future virtual certainty. It means DTA can be realized only when the company reliably estimates sufficient future taxable income. This test for virtual certainty has to be done every year on balance sheet date and if the condition is not fulfilled, such DTA/DTL should be written off.
While computing future taxable income, only profits pertaining Business and Professional should be considered and not the income from other sources.

 

This article written by Mr. Sourav Sewri

 

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