Deferred Tax Assets and Deferred Tax Liability

Deferred Tax (DT)

The tax effect on the timing differences is termed as deferred tax which literally means taxes which are deferred. Deferred tax is recognised on all timing difference – Temporary and Permanent.

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

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)

Illustration on DTA/DTL Calculation

Let’s understand how DTA/DTL is created in books with a simple example (amount in lacs):

Particulars	For Book	For Tax	Difference	(DTA)/DTL @30%
Income	1000	800	200
Opening Balance of (DTA)/DTL	–	–	–	–
Depreciation	100	200	100	30
Sales Tax payable	50	0	(50)	(15)
Leave encashment	200	100	(100)	(30)
Closing balance of (DTA)/DTL	–	–	–	(15)

Current tax on Taxable income is 800*30% = 240

Deferred tax as per above                               = (15)

Net tax effect                                                     =225