Income tax Query
This query is : Resolved
16 October 2010
Deferred tax is an accounting concept (also known as future income taxes), meaning a future tax liability or asset, resulting from temporary differences or timing differences between the accounting value of assets and liabilities and their value for tax purposes.
Situations which leads to Deferred Tax:
Deferred tax is the tax effect due to timing difference. They arise due to the following reasons (situations):
1. Accounting Income less than Tax Income.
2. Accounting Income more than Tax Income.
3. Income as per Accounts but loss as per Income Tax Act.
4. Loss as per Accounts but income as per Income Tax Act.
The impact of such timing differences may lead to:
1. a. Deferred Tax Liability (DTL): Deferred Tax Liability (DTL) is postponement of tax liability, which states, “Save Now, Pay Later”.
Journal Entry
Profit and Loss A/c………Dr.
To Deferred Tax Liability A/c
1. b. Deferred Tax Asset (DTA): Deferred Tax Asset (DTA) is pay you tax liability in advance, which states, “Pay Now, Save Later”.
Journal Entry
Deferred Tax Asset A/c…….Dr.
To Profit and Loss A/c
In the year of reversing time difference, either Deferred Tax Liability (DTL) is written back to Profit and Loss Account or the Deferred Tax Asset (DTA) is revised by debiting Profit and Loss Account. For the recognition of Deferred Tax Asset (DTA), prudence should be applied. Such recognition is based on “reasonable certainty” that sufficient taxable income would be available in the future to realize the Deferred Tax Asset (DTA). In case of unabsorbed depreciation and carry forward losses, Deferred Tax Asset (DTA) should only be recognized to the extent that there is “virtual certainty” that in future sufficient taxable income would be available to realize the Deferred Tax Asset (DTA). Reasonable certainty shall be deemed to be in existence if the profitability of future taxable income is greater than 50%. Virtual certainty shall be deemed to be in existence only when the evidence suggests that there will be sufficient taxable income in the future.
Situations which leads to Deferred Tax:
Deferred tax is the tax effect due to timing difference. They arise due to the following reasons (situations):
1. Accounting Income less than Tax Income.
2. Accounting Income more than Tax Income.
3. Income as per Accounts but loss as per Income Tax Act.
4. Loss as per Accounts but income as per Income Tax Act.
The impact of such timing differences may lead to:
1. a. Deferred Tax Liability (DTL): Deferred Tax Liability (DTL) is postponement of tax liability, which states, “Save Now, Pay Later”.
Journal Entry
Profit and Loss A/c………Dr.
To Deferred Tax Liability A/c
1. b. Deferred Tax Asset (DTA): Deferred Tax Asset (DTA) is pay you tax liability in advance, which states, “Pay Now, Save Later”.
Journal Entry
Deferred Tax Asset A/c…….Dr.
To Profit and Loss A/c
In the year of reversing time difference, either Deferred Tax Liability (DTL) is written back to Profit and Loss Account or the Deferred Tax Asset (DTA) is revised by debiting Profit and Loss Account. For the recognition of Deferred Tax Asset (DTA), prudence should be applied. Such recognition is based on “reasonable certainty” that sufficient taxable income would be available in the future to realize the Deferred Tax Asset (DTA). In case of unabsorbed depreciation and carry forward losses, Deferred Tax Asset (DTA) should only be recognized to the extent that there is “virtual certainty” that in future sufficient taxable income would be available to realize the Deferred Tax Asset (DTA). Reasonable certainty shall be deemed to be in existence if the profitability of future taxable income is greater than 50%. Virtual certainty shall be deemed to be in existence only when the evidence suggests that there will be sufficient taxable income in the future.
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16 October 2010
Also go through the following PPT..it will explain u a lot..
www.caalley.com/ca/AS-22%20on%20Deferred%20Taxation.ppt
www.caalley.com/ca/AS-22%20on%20Deferred%20Taxation.ppt
16 October 2010
Little more details are given hereunder:-
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.
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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