Motichand GuptaMotichand Gupta

Deferred Tax Accounting

In this series, I would like to share few practical scenario where I came across during my work.

1. Entry Tax : Suppose your company is buying some materials from other state to in the state of Maharashtra. Department has initiated assessment proceeding where it held that company is liable for Entry Tax in the state of Maharashtra @ 12.50%.

Also Read-Accounting for Deferred Tax provisions under Accounting Standard (AS)-22

In the financial year 2014, Department served a notice of demand of Rs. 50 crores, 60 crores and 70 crores for FY 07, FY 08 & FY 09. Subsequent to this, the company has made a provision of Rs. 180 crores in FY 14. Being this provision covered u/s 43B as a statutory liability, same has been disallowed in November, 14 in Tax Audit Report (3CD) on account of non payment. On account of this, company has to create Deferred Tax Assets @ 33.99% on Rs. 180 crores.

Following entry to be passed in FY 15-, in Nov, 2014

Deferred Tax Assets A/c Dr.             61.18 Cr.

To Deferred Tax P & L A/c                 61.18 Cr.

Assuming that in FY 16, in the month of June, 15 company has made payment of Rs. 50 Cr. for FY 07 Entry Taxs. On account of this, company will reverse deferred tax assets to the extent of following-

Deferred Tax P & Loss   A/c Dr. 17.31 Cr.

To Deferred Tax Asssets       17.31 Cr.

(Being Deferred Tax reversed @34.61% being increase in Surcharge from 10% to 12%)

Now assume that company is paying remaining amount of Entry Tax of Rs.130 crores in FY 17 then following entry to be passed.

Deferred Tax P & Loss a/c Dr. 43.87 Cr.

To Deferred Tax Assets A/c   43.87 Cr.

(Though, Deferred tax @ 34.61% comes to Rs. 44.99 Crores but you have to reverse balance amount of Deferred tax assets ie Rs.61.18 cr – Rs. 17.31 cr.)

2. Additional deferred Tax on account of increase in Surcharge.

Generally, company follow profit and loss approach from April to February, and in the month of March, they follow Balance sheet approach for creating of Deferred tax assets / Deferred tax liabilities. Suppose, in FY 15 tax rate is 33.99 % being 10% surcharge and in FY 16 it became 34.61 % on account of increase in Surcharge from 10% to 12%. Suppose your total assets on which deferred tax liability is to be created is Rs. 1000 crores then additional deferred tax liability of Rs. 6.2 crores ((34.61%-33.99%)*1000) is to be created as on 1.4.2015 being change in the rate of tax.

Following entry to be passed on 01.04.2015

Deferred Tax P & Loss A/c Dr. 6.2 crores

To Deferred Tax liability     6.2 crores.

3. Deferred Tax in case of 80IA unit. :

Company is eligible to claim 80IA profit as exempt for the period of 10 years out of 15 years from the year of commercial operation. As per AS-22, timing difference getting reversed during the tax holiday period to the extent deferred tax liability is not to be created. Timing difference which originate first is to be set off first. In the attached example, the management thought of claiming 80IA from 6th year onward.

year
Tax Depreciation
Account depreciation
Timing difference
Timing difference after adjustment
Deferred Tax (Timing Differences * 30%
Accumulated       Deferred Tax
1
127.68
6.21
121.47 (O)
-41.19
2
191.74
77.68
114.06 (O)
72.87 (L)
72.87*33.99% =24.76 (L)
24.76 (L)
3
112.10
80.64
31.46 (O)
31.46 (L)
31.46*33.99% = 10.69   (L)
35.45 (L)
4
89.22
80.92
8.30(O)
8.30 (L)
8.30*33.99% = 2.82 (L)
38.27 (L)
5
84.04
-25.36
109.4 (O)
109.40 (L)
109.4*33.99% = 37.19 L)
75.46 (L)
6
74.54
55.47
19.07 (O)
19.07 (L)
19.07*30% = 6.48 (L)
81.94 (L)
7
63.73
55.47
8.26(O)
8.26 (L)
8.26*33.99% =2.81 (L)
84.75 (L)
8
50.30
55.48
-5.18 (R)
84.75 (L)
9
42.94
55.48
-12.54 ( R)
84.75 (L)
10
36.70
55.48
-18.78 ( R)
84.75 (L)
11
31.38
55.47
-24.09 (R )
84.75 (L)
12
26.85
55.46
-28.61 (R )
84.75 (L)
13
22.98
55.45
-32.47 (R )
84.75 (L)
14
19.68
54.33
-34.65 (R)
84.75 (L)
15
16.86
23.20
-6.34 (R)
84.75 (L)

In this example, the total reversal of Rs.162.66 crores comes from the year 6 th year to the 15th year and therefore, the company has not created any deferred tax liability in the year 2 as per AS-22.

However, suppose when company thought of claiming 80IA for 6th year as a first year of 80IA claim and found that the company is not in position to claim 80IA on account of loss and for remaining years also on account of high interest elements , company has to immediately create deferred tax liability.

Following entry to be passed in year 7 in April as one time impact.

Deferred Tax liability P & L A/c Dr.   55.28 Crores

To Deferred Tax Liability A/c         55.28 Crores.

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