Income Tax efiling in India for FY 2023-24 (AY 2024-25)
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What is Deferred Tax - Assets And Liabilities
As per the company rules & regulations, there are two types of statements prepared by an organization: the income statement report and the tax statement report. The statement report is a recording of company’s financial position & stability. A company’s financial statement shows growth potential, cash flow, and fiscal health. Deferred tax is an essential element mentioned in the statement that is carefully analyzed in financial statements. Deferred Tax Assets (DTA) and Deferred Tax Liabilities (DTA) are revised in a company’s accounts at the end of a financial year. Hence, these elements affect the income tax outgo of the company.
What is Deferred Tax?
A deferred tax is an essential component of the balance sheet that helps to reduce taxable income. The deferred tax has both impacts positive & negative on the balance sheet. This entry deferred tax can be in the form of an asset/liability in the balance sheet. If an individual has paid advance taxes & got a tax credit that can be used in the future, then it will be considered under assets. If a business is liable to deliver additional taxes in the future, then it will be considered a liability. The only difference in deferred assets & liability happens due to a timing difference.This indicates that there is a gap between taxable income and book income (company's financial income before its taxes are taken into account). Let’s look at the type of Deferred Tax to understand the concept better.
Types of Deferred Tax
There are 2 types of deferred taxes which are explained as follows-
What is a Deferred Tax Asset?
Deferred tax shows that a company has items or financial backup for forthcoming requirements. The balance sheet indicates that the company has paid applicable advance tax/an overpayment. In case the Individuals would get a refund for the excess amount paid. On the changes in taxation rules, a company can have deferred assets. For example, It can also transpire when a company had gone through a loss during the financial years. Then, the assets can be utilized to balance the losses incurred.
Situations when Deferred Tax assets may arise-
Revenue earned is taxed even before the time of recognition. the taxing authority takes the expenses into account even before they need to be recognized. The tax rules or base for assets and liabilities are not similar.
Let's understand DTA (Deferred Tax Asset) with an example
Let us take the example of the company ABC which manufactures mobile phones. The company ABC assumes that the probability of a mobile phone being sent for warranty repairs is 2%. If the revenue of ABC company is Rs.10,00,000 for the financial year 2019, then the following difference would appear in the tax authority statement & income statement.
What is Deferred Tax Liability?
Deferred Tax Liability (DTL) deals with the tax dues of a company. It happens in the case of the balance sheet when a company has underpaid the tax liabilities and promises to pay in the future. In simple terms, the deferred tax liability is a tax due for payment in the current year but has yet to be paid. This indicates that the tax will be remained to pay in future periods. It is worth noting that the liability does not show whether a company paid a single amount against tax. Eventually, the company agree to pay the tax but at a different period. In a balance sheet of the company, deferred tax indicates that the taxable income is lower than the revenues stated in the financial statement of the company. The following are the conditions that can create a Deferred Tax Liability- When a company drives its proceeds to showcase the shareholders. When companies practice dual accounting. They hold an extra copy of financial statements for personal use tax experts. When companies try to minimize their tax amount by putting the current profits for the future. When they utilize the extra income for the operations of business instead of paying taxes. Their goal is to enhance profits.
Let’s have an example to understand the Deferred Tax Liability-
Assume that there is a company ABC which manufactures mobile phones. The company ABC assumes that a manufacturing machine that costs Rs.1,20,000 will last for 3 years and it pays a 30% tax on profits. However, regular financial accounting will consider the Rs.40,000 depreciation per year for the next 3 years. Hence, each year income is reduced by Rs.40,000, and Rs.12,000 reduction in tax. However, suppose the tax accounting allows depreciation in such a way that Rs.60,000 is the depreciation in the first year, Rs.40,000 in the next, and Rs.20,000 in the third year. So for the first year, the company can claim Rs.60,000 as depreciation and it gets a tax benefit of Rs.18000. So it creates a tax liability of- Rs.18,000 - Rs.12,000 which is, 6,000 (a tax that the company should have paid on the basis of accounting) - (the tax that it actually paid) Therefore, a deferred tax liability (DTL) of Rs. 6,000 has been produced. This liability, the company needs to make up for future taxes transactions. Summing up, the deferred tax is a difference between the two calculations which helps the entities to be financially prepared for the future. On the other hand, evaluating the deferred tax can also help in reducing tax liabilities.
Frequently asked questions
What is Deferred Tax
Krishna Gopal Varshney
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