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Introduction: Deferred tax, often seen as a notional asset or liability on a balance sheet, plays a crucial role in bridging the gap between income computed as per the Income Tax Act, 1961, and accounting income. This article aims to unravel the complexities surrounding deferred tax, focusing on assets, liabilities, and the methodology for re-verifying its computation.

Deferred tax asset/liability is an item of balance sheet which is a notional Asset or a liability. Deferred tax comes into picture when there is a difference in Income computed as per Income tax Act ,1961 and accounting income. Generally, the company follows set of accounting policy, refers required accounting standards while preparing its financial statements. However, when the same income is offered to Tax; Income Tax Act,1961 mandates disallowance of certain expenses like personal expenditure, expenses on which TDS is not deducted etc. leading to difference in Taxable income and accounting income.

The differences can be classified into permanent differences and timing differences.

Permanent differences are those which pertains to one period and cannot be reversed subsequently. Such differences are not considered while accounting for deferred taxes. Example for permanent difference-(i) Interest on income tax paid in FY 22-23 pertaining to FY 21-22. This interest cannot be reversed subsequently in future years (ii) Personal expenses which attracts disallowance and cannot be claimed in future years.

Timing differences are those which pertains to one period and can be reversed in one or more subsequent periods. This difference arises when certain income/expenses are included in taxable income which differs with the period in which such income/expenses are considered in arriving at accounting income. Example for timing differences: Difference in depreciation as per Income Tax act [WDV] and Companies Act,2013 [based on useful life], Expenses specified in Section 43B.

Computation of deferred tax leads to either an asset or a liability.

Deferred Tax asset is an item that leads to reduction of Income tax liability of an entity for future periods or results in a refund of an already paid amount of Income tax.

Journal entry for DTA:

Deferred Tax Asset [BS item]

To Deferred Tax Expense [P&L item]

Deferred Tax Liability increases the income tax liability of an entity or decreases the amount of tax refund in future period.

Journal entry for DTL:

Deferred Tax Expense [P&L item]

To Deferred Tax liability [BS item] *BS-Balance Sheet ; P&L- Profit and Loss

Methodology to re-verify the DTA/DTL computation:

Eg: Profit before tax as per P&L statement: Rs. 35,73,000/-

Deferred Tax expense computed -Rs.5,000

Income tax expense computed-Rs. 95,000

Permanent disallowance-Rs. 2,500 [Interest on Income tax]

Actual Tax rate: 22%+10% surcharge+4% cess [if opted for Sec 115BAA]

Effective rate computation= Total tax expense

Profit before Tax+ Permanent disallowance

=5,000 [Deferred Tax]+ 95,000[Income Tax]

35,73,000+2,500

=1,00,000/35,75,500 =25.17% [ Tallies with Actual tax rate]

Where the effective tax rate does not tally with the actual tax rate, this means that certain items have not been considered for computing, thus requires re-checking of DTA/DTL computation.

Conclusion: In conclusion, understanding deferred tax is essential for accurate financial reporting. The interplay between assets, liabilities, and the re-verification methodology ensures that entities reflect their tax positions faithfully. The examples provided shed light on practical scenarios, aiding professionals and businesses in navigating the complexities of deferred tax computation with confidence.

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