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deferred tax

ankit goyal (CA Final Student) (102 Points)

28 June 2008

as we all know that as per companies act,1956 we need to depreciate our assets to 95 % of their book value. while as per IT act we would be depreciating our assets 100%,

while calculating deferred tax we take the difference of WDV as per companies act and WDV as per IT Act. but would that mean that we would create deferred tax on 5% permanent difference (Difference of 100% and 95%)which is a permanent difference

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5 Replies

sarvesh (CA Final Student & Service) (67 Points)
Replied 30 June 2008

This is what i think!!

yes we would..as the difference will always remain...however the depreciation has to be done considering the final year of the life of the asset till it depreciates fully.for ex:an asset valued Rs 100 will be depreciated to 95% value over the years under the comapnies Act.It will be depreciated 100 % under the IT Act.Now say the dep rate is 20 % then it would be depreciated in 5 years.The deferred tax will be a matter of concern in the last year and not as a permanent difference over the 5 years.

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arun (ca student) (194 Points)
Replied 01 July 2008

Can you pls tell me what is defered tax assets and what is its treatment in books of accounts????

sarvesh (CA Final Student & Service) (67 Points)
Replied 01 July 2008

Sure..

They are also known as "timing difeerences".To tell you in brief-

Books have to be maintained for any organisation as per the Companies Act,1956.There are some items which are not taken into consideration while calculating the profits under the Income-tax Act.As also there are different rates of depreciation that are applied to assets.Now when profits are calculated under two different ways it tends to give you two different answers.Now if the difference is a positive one then it is known as deferred tax asset.If its negative then its a liablity.

This is how a layman will understand it.If you need technical aspects of the same please refer AS-22 for futher clarification.

Thanks & Regards

Sarvesh.

ankit goyal (CA Final Student) (102 Points)
Replied 03 July 2008

hi,

bro, if there is a permanent difference then y we would be creating deferred tax

sarvesh (CA Final Student & Service) (67 Points)
Replied 03 July 2008

Hi Sir

You are mixing two things here.A)that assets have to be depreciated at different rates & B)there is not a permanent difference.

What you are thinking as a permanent difference is not relevant here.Please refer to AS-22 for clarification.If you already have then you can mail me at sarveshdeoras23 @ gmail.com.I think I'd be able to explain it to you better over there.

Thanks & Regards

Sarvesh