Accounting for Deferred

Tax
 Fundamental Differences between
Financial and Tax Reporting

Financial Tax

Statements Returns

Are Prepared Prepared on the basis

following Ind As of the Provisions of
Income Tax Act

Provisions are made

Tax is calculated on
for tax on Profit
Taxable Income
before Tax (PBT)
 Deferred Taxes: Basics

• Deferred taxes arise when income tax expense

(provision) differs from income tax liability.
• The tax expense is determined under Ind AS
(Accounting Standards).
• The income tax liability is determined under the
Income Tax Act.
• Some of these differences are temporary and
reverse over time.
• Others are permanent and do not reverse.
• Deferred Tax is related to temporary and
reversible differences.
 Temporary Differences:
Different Situations
• Revenues and gains, recognized in financial
income, are later taxed for income tax purposes.
• Expenses and losses, recognized in financial
income, are later deducted for income tax
purposes.
• Revenues and gains are taxed for income tax
purposes before they are recognized in financial
income.
• Expenses and losses are deducted for income
tax purposes before they are recognized in
financial income.
 Summary of Temporary Differences
When recorded When recorded Deferred
Transaction
in books on tax return tax effect

Rev or Gain Earlier Later Liability

Rev or Gain Later Earlier Asset

Exp or Loss Earlier Later Asset

Exp or Loss Later Earlier Liability

 Examples:

• Different Depreciation Treatments:

– e.g. Equipments for scientific research
– IT allows dep. on w.d.v.method
• Some expenses (e.g. taxes) are not
recognized by IT department on Accrual
Basis
• Some expenses are allowed on
installments (e.g. VRS exp. In 5 intls.)
 Accounting Presentation

• The difference between closing and opening

deferred tax liability measures the deferred tax
expense for the period.
• The difference between closing and opening
deferred tax assets measures the deferred tax
benefit for the period.
• Deferred tax liability is presented in Balance
Sheet after the head “non current liability”
• Deferred tax asset is presented in Balance
Sheet after the head “non current assets”
 Summary of Permanent Differences
Sources of Permanent Differences

Some items are recorded but NEVER

in Books on tax return

are NEVER but recorded

Other items
recorded in books on tax return

No deferred tax effects

for permanent differences
 Exercise:
Problem: 1
Income Statements
Income Statements 2004 2005 2006
PBDT 200 200 200
2004 2005 2006
Less Depreciation for Accounting
PBDT
Purpose 200
50 200
50 200
50
Less
PBT Depreciation for Accounting 150 150 150
Purpose 50 50 50
Tax Expense 20 80 80
PBT 150 150 150
PAT 130 70 70
Tax Expense 20 80 80
Deferred Tax Expense(-)/ benefit (+) -40 20 20
Tax Returns
PAT 90 90 90
PBDT 200 200 200
Balance SheetAllowance
Less: Depreciation 150 0 0
PBT
Liabilities: 50 200 200
Tax Payable
Unsecured for the Year
Loans 20 80 80
Deferred Tax Liability 40 20 0
 How do we calculate deferred tax
Liability
2004 2005 2006

Depreciation as per
Income Statement 50 50 50

Depreciation as per
Income tax Law 150 0 0
Difference -100 50 50

Income Tax under (-)/

Over (+) paid -40 20 20
 How Do we Record It
2004
Profit and Loss A/c Dr. 60,000
To Current Tax A/c 20,000
To Deferred Tax A/c 40,000
2005
Profit and Loss A/c Dr. 80,000
To Current Tax A/c 80,000

Deferred Tax A/c Dr. 20,000

To Profit and Loss a/c 20,000
2006
Profit and Loss A/c Dr. 80,000
To Current Tax A/c 80,000

Deferred Tax A/c Dr. 20,000

To Profit and Loss a/c 20,000
 Problem:2
2001 2002 2003
Tax Returns
Profit or Loss -100 50 60
Loss Carried Forward and Off-set 100 50 50
Taxable Income nil nil 10
Tax nil nil 4

Income Statement
Profit or Loss -100 50 60
current Tax nil nil 4
Deferred Tax 40 -20 -20
Profit after Tax -60 30 36

Balance Sheet
Assets
Investments
Deferred Tax Asset 40 20 nil
 Provisions for Tax

• The assessment by the IT Department

takes time.
• Final Tax liability is not known till final
assessment.
• Therefore, we need to make provision for
current years estimated tax liability.
 Advance Tax Payment

• For Corporate Assessee

Due Dates Amount of Tax payable
– On or before 15 June - not less than15% of tax payable
– On or before 15 September - not less than 30% of tax payable
– On or before 15 December - not less than 60% of tax payable
– On or before 15 March - not less than 100% of tax payable
• Since, the actual tax and actual income can be
computed only after completion of the year therefore, the
income is estimated at different due dates mentioned
above.
• The tax on such estimated income is computed and
percentage of the tax as mentioned above is payable by
the assessee at different due dates.