Deferred Tax Assets and Liability Calculation

Deferred Tax Liability (DTL) or Deferred Tax Asset (DTA) item forms an important part of your Financial Statements. 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.

Accounting profit as shown in company’s financial statements differs with the IT profit for many reasons. One of such reason is timing difference. Timing difference arises due to difference in rate of depreciation, method of depreciation and expenses allowed in calculation of accounting profit but now allowed in calculating IT profit.

Timing Difference

1. Temporary Difference – Differences between book income and tax income which are capable of reversing in subsequent period

2. Permanent Difference – Differences between book income and tax income which are not capable of reversing in subsequent period

If depreciation charged for the year as per companies act is Rs. 250000 and depreciation charged as per IT act is Rs. 450000 then accounting profit will differ from IT profit. In our case we have charged Rs. 200000 more to IT profits. This means profit as per IT act must have been reduced.

As higher depreciation is charged to IT profit, the company has deferred a liability which will be paid in future years i.e. deferred tax liability of Rs. 61800 (30.9% of 200000).

In coming years, depreciation charged by IT act will be lesser as compare to companies act, as already the value of asset has been reduced drastically in IT act because of charging of higher depreciation.

This means in future years when depreciation as per companies act will be more compare to IT act, we have to create deferred tax asset for the difference amount based on the tax rates applicable at that time.

Example – Calculation and impact of deferred tax liability and asset

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 Taxable 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)