Differed Tax is difference in the tax liability as per
Accounting profit and Tax liability as per Income tax Act
Differed tax araises due to timing differences of
recognition of various tax deductible transactions in both
Accounting and tax calculations.
Eg: Depreciation on Fixed Assets.
for example As per companies act one asset is eligible for
100% depreciation in the first year itself, but the case
may not be the same under sec 32 of the Income tax act it
may gives some other rate of depreciation on that
asset.lets assume it allows only 50% in the first year and
remaining in the subsequent year.
as per accounting books shows a lower profit and tax
liabiltity due to higher depreciation claimed in this year
ony compared to IT profit.
It is a clear case of Differed tax asset..... we will pay
more in this year we will carry it as a differed tax asset
in our balance sheet which is going to be offset in the
coming year...... in the short range period difference will
apprear but in long range timing difference is going to be
One more thing Differed tax will not araise due to
permanent differences between these two profits.
If you reverse the above example it will give the situation
of differed tax Liability.
A tax liability that a company owes and does not pay at
that current point, although it will be responsible for
paying it at some point in the future. This is often caused
by a difference in a company's balance sheet, due to the
differences between accounting practices and tax
regulations. Occasionally, a company will have a difference
in their taxable income and income before tax due to these
differences, resulting in a deferred tax liability.
To get into Deffered Taxes .. Lemme cleard the basis:
Book Income: Income calculated suing accounting principles
in accordance with GAAP.
Taxable Income: Income calculated in accordance with the
Government stipulated policies and procedures, that govern
Now put simply the concept of DEFFERED TAXES arises beacuse
there is a difference in the amount of tax liablity
calculated using accounting principles as VS. tax
liablities using Government mandated laws.
=> Therefore the reason why DEFFERED TAXES occour is due to
temporarily timings difference between book value and
Example: A company uses Straight-Line Method of
depreciation for its accounting records. But the law allow
an accelerated depreciation method of writing of an assets.
The company takes advantage of this due to favourable tax
treatment in as much as it's able to report lower income
and hence pay lower taxes.
Deferred tax is an accounting concept, meaning a future tax
liability or asset, resulting from temporary differences
between book (accounting) value of assets and liabilities
and their tax value, or timing differences between the
recognition of gains and losses in financial statements and
their recognition in a tax computation.