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Deffred tax

pawan lakhotia (education) (138 Points)

03 December 2007

Hi Friends,

can anbody tell me about deffred tax in detail.what is the accounting treatment and how the benefits of deffred tax liability is calculated. plz its urgent

Thanks in advance .please

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2 Replies

Nidhi Jain (Chartered Accountant) (54 Points)
Replied 03 December 2007

Deferred tax concepts basically arises because as per Income tax or Mat w.e. tax is higher should be your tax liability then in your finiancials amount of tax provision will be as per the above which is not companies actual tax liability and earning per share is fluctating every year. So to remove this hurdle this concept is introduced by the ICAI. Simplest method to calculate is Balance Sheet Approach: Net Block as per Co. Act **** Less: Net Block as per IT Act **** Net Deferred Liability ***** Less: Unabsorbed Depreciation**** Less Other Timing Difference ***** Net Deferred Liability ***** Apply Rate of coming F.Y. Total Deferred Tax Liability as on the Date

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Prashanth Kamath (AICWA) (34 Points)
Replied 03 December 2007

Deferred taxes arises due to difference in the way certian items are treated in financials as per the companies act and as per IT Act. The idea behind bringing deferred taxes into books of accounts is on the basis of "matching concept" of accounting .
The income tax charge shall match the incomes disclosed in the books of accounts irrespective of time when it is payable as per IT laws.
For Eg: Depreaciation as per Schedule XIV is different from the IT Act . Former is normally lower and later is higher . Due to this the profit as per p&l as per co's act and IT Act willn't match as profit is higher as per P&l and lower as per IT p&l . Hence Deferred tax liability is brought into the books as this is only a timing difference by debiting the Profit and loss account and crediting deferred tax liability a/c

This explanation is only a tip of the iceberg. Please refer AS 22 for better understanding.

Regards
Prashanth