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calculation of Deffered Tax Liability And Deffered Tax Asset (Income Tax)

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( Author )
23 September 2009

What is deffered tax liability and deffered tax assets? what is the procedure for its calculation? Pls Guide me.


Kapil Arora

( Expert )
23 September 2009



CA RAMESH KUMAR AHUJA

( Expert )
23 September 2009

Deferred tax: The concept of deferred tax, as one requiring adjustment of profit, has also been a matter of historical accounting.
Timing differences arise out of various situations, some of which are short/long term while others permanent. Short-term differences arise because of disallowances -- such as bad debts or accrued expenditure -- likely to be paid and allowed in the very next year.
Long-term differences, which are not permanent, may arise out of accelerated/differential depreciation amortised in the assessee's books at normal rate. Rollover relief, which is now recognised under the block scheme of depreciation, will also spread over amortisation to a longer period. Such temporary differences are described as timing differences in AS 22. Permanent differences arise in respect of capital expenditure on which depreciation is not admissible, or items such as entertainment expenditure which are disallowed.
Section 43B is a classic case of timing difference, both temporary and permanent. Interest payable to banks and financial institutions are examples of temporary difference deductible on payment, while delayed welfare dues do not get allowed at all, servi ng as an example of a permanent difference.
Timing differences -- no precise guidelines: Treatment of deferred taxes has been the subject matter of treatises on accountancy, though not in accounting practice in India. Spicer and Pegler, in Book Keeping and Accounts, draws attention to the need for deferred tax to make the system more realistic, but there is no consensus about the manner in which it should be translated in accounting.
The following guidelines may be followed as a Golden Rule for the calculation of deferred tax asset or liability:

1. Analyse and compare the WDV as books and Income tax as on the date of balance sheet. In case, the WDV as per books is more, a liability is to be created otherwise an asset.

2. Take out the difference of the two WDVs as said above. Apply current tax rates on the difference in WDVs, it will be ur liability or asset requirement as on the date of B.sheet for current year.

3. The difference of liability/asset as on CY b.sheet and LY B.Sheet may be adjusted to P & L a/c to make the figures to the CY requirement.


4. All other timing differences may be compared in the similar way. Say, there is increase in the figure of CF losses then the current rate applied on the new CF loss will be the requirement of asset as on date.


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