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Deferred Tax Liability

Sumiti Jain (FP) (1364 Points)

04 February 2011

On what amount we should calculate Deferred Tax Liability--

Whether on the difference of WDV of fixed assets as per Co. Law and as per IT Act, or

on the difference of Depreciation calculated for the year as per Co. Law and as per IT Act ?

I m studying a Balance Sheet of one of our client, In Last Year Balance Sheet DTL has been calculated on the difference of WDV but as per my knowledge it should be calculated on Difference of Depreciation?

Can anybody please give the detail of this aspect?

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16 Replies

Vineet Jain (CFO) (59 Points)
Replied 04 February 2011

Dear Sumiti - It is calculated on the difference between WDV as per Co. Law and WDV as per IT Act.

Rgds,

vineet_jain2005 @ pgp.isb.edu

1 Like

Pankaj Arora (Learner) (3134 Points)
Replied 04 February 2011

Agree with above answer

Sumiti Jain (FP) (1364 Points)
Replied 05 February 2011

But we should have to see the effect on profit due to change of method in Depreciation & profit is effected by the depreciation amount

isn't it?

rachit jain (chartered accountant ) (635 Points)
Replied 05 February 2011

deferred tax liabilities/ assets arises only when there is a different treatment of transaction in companies act and i.t act in p&l. so it has to be calculated on difference between dep in co act and i.t act

1 Like

pravin (student) (38 Points)
Replied 05 February 2011

DTL / DTA arises only on timing differences. Timing difference is the once which can be reversed in the following years.

Take a Case

If the book profit is 100 after dep say 5

IT dep is 7. the Diff between the IT dep and Book Dep. will be the timing Difference and accordingly DTL/DTA will be calculated. and not on the WDV.

So ur IT income will be 100+5-7 =98 u pay tax on 98 as per normal rates and calculate DTA /DTLon Timing difference and provide provision. both are tax expenses

1 Like

nirmal jain (student) (75 Points)
Replied 05 February 2011

DTL is always calculated on the differnce in depreciation as per companies act or IT act.

as per my knowledge u see that balance sheet again its possible that they dont add the opening balance of DTL the differnce may be shown as clossing balance. becoz every year u can take dep differnce in general condition but if u take WDV differnce then its shows the clossing balance of DTL.

Closing WDV - Op WDV then @ taX U WILL FIND THE DTL

DEP - DEP @ Tax u will also find the DTL

or Closing WDV-Cl WDV then = Cl DTL

OP WDV - OP WDV = op DTL

1 Like

(Guest)

agree with pravin

1 Like

Ravi Rawat (Chartered Accountant) (116 Points)
Replied 05 February 2011

DTL for the current year is to calculated on the difference of Depreciation amount.

Detailed calculation can be understood by going through the attached Excel Sheet

Attached File : 39 dtl.xls downloaded: 2306 times

1 Like

MUKESH KUMAR KABRA (ARTICLE) (26 Points)
Replied 06 July 2011

Hi Friends,

As per my knowledge DTL is always calculate only those item whose reversing in furture or exempt under incometax act. (like difference in Dep. as per company act. & as per IT act. and donation deductible u/s 80 G.)

p/s give comment.

Hiresh (Chartered Accountant) (25 Points)
Replied 25 July 2011

Deffered Tax needs to be calculated by taking Difference between Depn as per Co & IT. As explained above in the excel woking posted by one of the member, i have doubt will this excel on calculation of deffered tax will worki If in case there is sale of asset (Case 1 Profit on Sale and Case 2 Loss on Sale).

suresh (student) (21 Points)
Replied 28 September 2011

SIR,

I HAVE A SMALL DOUBT WETHER SURCHARGE SHOULD TAKE WHILE CALCULATING DEFFERED TAX LIABITY

THANKING YOU

SURESH

Sarika M (Credit Manager) (40 Points)
Replied 19 November 2011

deferred liability calculation:

purchase of assest:$1000

Straight line method of depreciation for 5 years-as per accounting

25% tax depreciation -wdv

in first year:

$800-Accounting

$750-IT

method -1:balance sheet approach

800-750=50

deferred tax liability is 50*35%

method -2

difference in depreciation 50*35%

but in second year the answer between two methods differs

method -1

600-563= 37*35%

Sarika M (Credit Manager) (40 Points)
Replied 19 November 2011

deferred liability calculation:

purchase of assest:$1000

Straight line method of depreciation for 5 years-as per accounting

25% tax depreciation -wdv

in first year:

$800-Accounting

$750-IT

method -1:balance sheet approach

800-750=50

deferred tax liability is 50*35%

method -2

difference in depreciation 50*35%

but in second year the answer between two methods differs

method -1

600-563= 37*35% and in second method:200-187.5=12.5*35% is the second method correct?

Versatile....... (Chartered Accountant) (82 Points)
Replied 19 November 2011

@ sarika.....yes both method's will result in same DTA/DTL....in Direct Method (WDV as per Co. Act- WDV as per IT Act)* Rate is the DTA /DTL to be created at year end.....but in Indirect Method...[(Dep. as per Co. Act- Dep. as per IT Act)*Rate +/- DTA/DTLat the beginning].. will result in DTA/DTL at year end...in ur example..

At 2nd Year End...

DTL as per Direct Method...(600-562.50)*35% = 13.125

DTL as per Indirect Method...(200-187.5)*35% = 4.375(this is DTA because Dep. allowed as per IT Act is less in comparision to Dep. as per Co. Act.. resuling in DTA on the difference of the two....now DTL already in the books at the beginning was 17.50...add the two & result will be same i.e (17.50-4.375) = 13.125(DTL as at year end).

both methods will give the same result always....

i hope ur querry stands solved now.