Income tax

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rahul narang

rahul narang (Querist)

23 January 2012 What is deffered Tax?

CA PARAS BAFNA

CA PARAS BAFNA (Expert)

23 January 2012 Deferred tax can be simply understood as future future tax liability or asset.

It is resulting from temporary differences or timing differences between the accounting value of assets and liabilities and their value for tax purposes.
Example:

In Accounts we provide depreciation on a Computer at the Rates prescribed under the Companies Act (say) 20%.

Whereas for the purpose of IT we provide Depreciation @ 60%.
.
On a computer of Rs. 100000/-
Dep. as per Books : 20000
Dep. as per IT : 60000/-
You can say that on 40000/ you have saved tax. If rate of tax be 30% , you have saved Rs 12000/-. This is known as Deferred Tax Liability.
.
As this tax saving is not going to be permanent. In years to come Dep. as per Companies Act will be higher and as per IT Act will be lower on the said computers.

In such circumstances we have to pay more IT. This excess tax payment will be met from the tax saved earlier.
.
This is a balancing exercise for better representation of the financial position
.

Bhaskaran Chackrapani Warrier

Bhaskaran Chackrapani Warrier (Expert)

24 January 2012 1.Source:-
AS-22 deals with deferred tax.
2.Focus;-
It is based on the matching concept.
3.Reason:-
Accounting income and taxable income may differ on account of various reasons.
4.Measurement;-
The difference as aforesaid is itemized and permanent differences are eliminated. The rest is called timing difference.
5.Timing difference;-
Those differences which lead to either saving in tax or payment of tax in the current year in the manner that such saving or payment is nullified in later years.
6.Recognition;-
Deferred tax should be recognized for all timing differences subject to consideration of prudence in respect of deferred tax assets.
7.Rates;-
deferred tax is to be recognized using the tax rates that have been enacted on the balance sheet date. If not enacted can be measured on the tax laws that have been substantially enacted as on the b/s date.
8. Positioning;-
deferred tax asset/liability should be disclosed separately from current assets and current liabilities in the b/s.
9.Disclosure;-
In the notes on accounts compliance of AS 22 may be mentioned as well as the workings of the deferred tax may be given.

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