In earlier years in India there were certain entities who were given lots of tax benefits in their initial years. Due to the tax benefits, these companies used to have no current tax liability and thus no provision of income tax was created by them in their books of accounts. However, these benefits were basically accelerated benefits and in later years, tax on them used to be recovered, such practice of not creating provision for tax liability on them, used to give distorted impression of profitability of company.
Thus, came the concept of Deferred Tax: Tax effect of timing difference/temporary difference
There are two approaches being followed by the companies to arrive at deferred tax amount. These are as follows:
AS-22: For the entities on which accounting standard is applicable, follow AS – 22 , which take items of statement of Profit and Loss to calculate deferred tax provision for an accounting year. It recognizes tax effect of difference between accounting income and taxable income.
IND AS – 12: For the entities on which IND AS is applicable, follow IND AS – 12, which takes the balance sheet approach to arrive at deferred tax Provision for an accounting year.
Will both the methods give same results or different one? They give same results. What differs, is the presentation.
Here through this article, our focus will essentially be on the presentation of deferred tax and its treatment in balance sheet and statement of profit and loss account.
What are the general circumstances on which Deferred Tax usually arise?
Following are the general circumstances, that can be found easily in financials of any company:
1. Depreciation on Plants, Properties and Equipment
2. Unabsorbed depreciation or Carry forward losses as per tax laws
3. MAT credit
4. Income received in advance
These are called timing differences. Basically their treatment as per Income tax act differ from that under Accounting standards/Indian Accounting standards.
Firstly, we will be discussing items of assets side of balance sheet. Here Positive results will mean creation of deferred tax liability and negative results will mean creation of deferred tax assets. We will denote Deferred Tax Assets as ” (DTA)“.
Before that we should have some clarity of certain terms which we will be using throughout our discussion on creation of (DTA)/DTL in case of items of assets side of balance sheet.
a) Carrying amount: This means the future economic benefit that an entity expect from the assets as per the Companies Act 2013
b) Tax Base: Tax Base in case of assets is the future deduction which will be allowed on the asset as per the income tax act.
c) Deferred tax liability will be created in case where Carrying amount as per Companies Act exceeds the Tax base. Because the entity expect more Future economic benefit than the future deduction it is going to get in future. Thus will be liable to pay taxes in future which is for now being deferred (Deferred Tax Liability)
d) Deferred Tax Assets will be created in case Tax base exceeds the Carrying amount of assets. Because it will mean, entity is going to get Future deductions which will exceed the expected Future economic benefit.
1. First let us discuss about Depreciation on Plants, Properties and Equipment
| Particulars | As per IND AS – 12 | ||
| Year 1 | Year 2 | Year 3 | |
| Purchased on 1st April 2022 | 6,000.00 | 4,000.00 | 2,000.00 |
| Depreciation as per Companies Act, 2013(assumed SLM) (C) | 2,000.00 | 2,000.00 | 2,000.00 |
| Carrying Amount as shown in Financial statement(A) | 4,000.00 | 2,000.00 | – |
| Opening Balance for Income tax | 6,000.00 | 3,600.00 | 2,000.00 |
| Depreciation as per Income tax (Assume 40%WDV) (D) | 2,400.00 | 1,600.00 | 800.00 |
| Tax Base (B) i.e. Future Deduction | 3,600.00 | 2,000.00 | 1,200.00 |
| Taxable Temporary Difference/( Deductive temporary Difference) (A-B) | 400.00 | – | (1,200.00) |
| Deferred Tax Liability /(Deferred Tax Assets) @ 30% assumed – It will go in balance sheet |
120.00 | – | (360.00) |
| Opening balance of DTL/(DTA) | – | 120.00 | – |
| Change in Provision in statement of Profit and Loss account | 120.00 | (120.00) | (360.00) |
| Reporting in Balance sheet as DTL or DTA as on the date of balance sheet for respective years | 120.00 | – | (360.00) |
| As per AS – 22 | |||
| Timing Difference (D-C) | 400.00 | (400.00) | (1,200.00) |
| Deferred Tax Liability /(Deferred Tax Assets) @ 30% assumed – It will go in statement of Profit and Loss |
120.00 | (120.00) | (360.00) |
| Opening Balance of DTL/(DTA) | – | 120.00 | – |
| Change in Provision in statement of Profit and Loss account | 120.00 | (120.00) | (360.00) |
| Reporting in Balance sheet as DTL or DTA as on the date of balance sheet for respective years | 120.00 | – | (360.00) |
Journal entries for Deferred tax in this case will be
| Year | Account | Debit (₹) | Credit (₹) |
| 1 | Profit & Loss A/c | 120 | |
| To DTL A/c | 120 | ||
| (Being DTL created – Will be deducted from PL as Tax expense component) | |||
| 2 | DTL A/c | 120 | |
| To Profit & Loss A/c | 120 | ||
| (Being DTL reversed – will be added in PL as Tax expense component) | |||
| 3 | DTA A/c | 360 | |
| To Profit & Loss A/c | 360 | ||
| (Being DTA created – will be added in PL as Tax expense component) | |||
2. Unabsorbed Depreciation or carry forward losses as per Tax Laws
The treatment and presentation of Deferred tax on unabsorbed depreciation and carry forward losses remain same for IND AS-12 and AS-22 both.
Unabsorbed depreciation and carry forward losses(calculated on the basis of Income tax act) can be claimed as deduction from profit in later years as per Income tax act. Thus always creating a deductible temporary difference and the scenario will always be as follows:
| Particulars | Year1 | Year 2 | Year3 |
| Carrying amount as per companies act | |||
| Unabsorbed Depreciation | – | – | – |
| Carry Forward Losses | – | – | – |
| Total (A) | – | – | – |
| Tax Base as per Income Tax Act (i.e. Future deduction) | |||
| Unabsorbed Depreciation | 20,000.00 | 15,000.00 | 10,000.00 |
| Carry Forward Losses | 40,000.00 | 20,000.00 | 10,000.00 |
| Total (B) | 60,000.00 | 35,000.00 | 20,000.00 |
| (Deductible temporary Difference) (A_B) | (60,000.00) | (35,000.00) | (20,000.00) |
| Deferred Tax Assets @ 30% – This will go in Balance sheet | (18,000.00) | (10,500.00) | (6,000.00) |
| Opening balance | (18,000.00) | (18,000.00) | (10,500.00) |
| Change in Provision – In statement of Profit and Loss | (18,000.00) | 7,500.00 | 4,500.00 |
| Deferred Tax Assets – In Balance sheet | (18,000.00) | (10,500.00) | (6,000.00) |
–
| Year | Account | Debit (₹) | Credit (₹) |
| 1 | DTA A/c | 18,000 | |
| To Profit & Loss Account | 18,000 | ||
| (Being DTA created – Will be added in PL as Tax expense component) | |||
| 2 | Profit & Loss A/c | 7,500 | |
| To DTA A/c | 7,500 | ||
| (Being DTA reversed – will be deducted in PL as Tax expense component) | |||
| 3 | Profit & Loss A/c | 4,500 | |
| To DTA A/c | 4,500 | ||
| (Being DTA reversed – will be deducted in PL as Tax expense component) | |||
3. MAT Credit
As per AS -22 deferred tax arise due to difference between Accounting profit and Taxable Profit. MAT being a tax expense itself does not give rise to any difference between accounting profit and taxable profit. Thus no deferred tax is created on MAT credit as per AS-22
As per IND AS -12 MAT Credit is also considered as Deferred Tax Asset and should be adjusted through statement of Profit and Loss account.
However, MAT credit is already a tax expense thus no need to again apply deferred tax rate (30% assumed) on MAT Credit.
Now, we will move to Liability side of balance sheet. Here onwards, negative results will mean creation of deferred tax liability and Positive results will mean creation of Deferred tax assets. We will denote deferred tax liability as “(DTL)”
4. Income received in advance taxed on receipt basis
| Particulars | Year 1 | Year 2 |
| As Per AS-22 | ||
| Income as per Income Tax (A) | 15,000.00 | – |
| Income As per books (B) | – | 15,000.00 |
| Timing Difference (A-B) | 15,000.00 | (15,000.00) |
| (DTL)/DTA – It will go in Profit and Loss account | 4,500.00 | (4,500.00) |
| Opening Balance | – | 4,500.00 |
| Change in provision in P&L | 4,500.00 | (4,500.00) |
| (DTL)/DTA in Balance sheet | 4,500.00 | – |
| As Per IND AS 12 | ||
| Carrying Amount of Liability(Income Received in Advance) | 15,000.00 | – |
| Tax Base (Carrying Amount- Future Deduction) (Note-1) | – | – |
| (Taxable Temporary difference)/Deductible temporary Difference (Note-2) | 15,000.00 | – |
| (DTL)/DTA – It will go in Balance sheet | 4,500.00 | – |
| Opening Balance | – | 4,500.00 |
| Change in provision in P&L | 4,500.00 | (4,500.00) |
| (DTL)/DTA in Balance sheet | 4,500.00 | – |
| Year | Account | Debit (₹) | Credit (₹) | Narration |
| 1 | DTA A/c | 4,500 | Being DTA created – Will be added in PL as Tax expense component | |
| To Profit & Loss Account | 4,500 | |||
| 2 | Profit & Loss A/c | 4,500 | Being DTA reversed – will be deducted in PL as Tax expense component | |
| To DTA A/c | 4,500 |
Let me explain a bit now
Note 1: Tax base in case of liability is Carrying amount of liability in balance sheet minus any future deduction of liability that will be claimed as per Income tax in future years.
As Income received in advance is taxed on receipt basis, in year 1 when the income will be received say Rs 15,000, the same will be taxed in the same year. At the same time as per books, assessee would have shown it as liability and would not have recognized it as income still.
In Year 2, Assessee will recognise the income in Profit and Loss account, but the same will be deducted while calculating Income tax ( As would have already been taxed in the previous year, the year of receipt).
Thus, for Assessee, standing in Year 1, Rs 15000 is the future deduction for Income received in advance.
Thus, in the example above:
Tax Base of Year 1 = Carrying Amount (15000) – future Deduction (15000) = 0
Tax Base of Year 2 = Carrying Amount (0, already settled) – Future deduction (0) = 0
Note-2: Calculation of Taxable temporary difference and Deductible temporary difference in case of Liabilities
Going by the logic of simple mathematics,
Temporary difference = CA – (CA – FD) = FD
Thus if the results are positive , it means Future deduction, meaning Deductible temporary difference and will result in creation of Deferred Tax Assets.
However, if the result is negative, It will mean taxable temporary difference and will result in creation of Deferred Tax Liability.
5. Other circumstances when Deferred Tax Liability and Deferred Tax Asset should be created are:
a) Provision for bad and doubtful debts disallowed- will be allowed when bad debts occur in future
b) Prepaid expenses – Deduction under income tax allowed on settlement basis/Payment basis
c) Expenses disallowed on non deduction of TDS, will be allowed later on payment of TDS
d) Accrued Income(Income receivable)
e) Investment in associate recorded through Equity Method. While Carrying amount in such case changes, tax base remain same.
Further, Deferred Tax assets should only be created if it is probable that it will be reversible in future against taxable profit. It means sufficient taxable temporary difference are expected in future.
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Disclaimer : This article is solely for educational purpose and cannot be construed as legal and professional opinion. It is based on the interpretation of the author and are not binding on any tax authority. Author is not responsible for any loss occurred to any person acting or refraining from acting as a result of any material in this article.
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Hi
Sub has 120mil DTA & 100mil DTL
Parent has 90mil DTA & 100mil DTL.
Its been three years since P acquired S. How to present this in group CSF? Note: No intragroup transactions!