Summary: Deferred tax arises due to distinctions between accounting income and taxable income as per the Income Tax Act. This necessitates the creation of either a Deferred Tax Asset (DTA) or a Deferred Tax Liability (DTL). DTA is established when future tax savings are expected, whereas DTL is created when an increase in future tax liabilities is anticipated. The underlying discrepancies are classified as either permanent or temporary. Permanent differences, such as specific penalties or certain disallowable expenses, do not result in deferred tax because these expenses are never permitted as tax deductions. Conversely, temporary differences, involving expenses disallowed in the current year but deductible in subsequent years (like delayed employer contributions or provisions), lead to the creation of deferred tax. Deferred tax is a non-cash transaction, meaning it does not affect cash flows and is excluded from cash flow statements. For financial reporting, DTA is classified as a non-current asset and DTL as a non-current liability, with the net amount presented on the balance sheet. Calculation involves applying the applicable income tax rate, along with surcharge and cess, based on the chosen tax regime. Journal entries reflect DTA as an income (credited to P&L A/c) and DTL as an expense (debited to P&L A/c). This framework addresses the timing differences in recognizing income and expenses for accounting versus tax purposes.
Deferred Tax under Income Tax Act:-
1.When to create deferred tax:-
When there is a difference between accounting income (as per books) & taxable income (as per the Income Tax Act), the assessee is required to create the deferred tax.
2. Types of Deferred tax:
a. Deferred Tax Assets (DTA)
b. Deferred Tax Liabilities (DTL)
3. Types of differences:
a. Permanent difference
b. Temporary difference i.e timing difference
4. When to create DTA:-
If there will be a tax savings in future then deferred tax assets will be created. Tax savings in the current year do not determine the creation of DTA.
5. When to create DTL:-
Deferred tax liability is created when there is an expected increase in tax liabilities in the future. Excess tax paid in the current year does not determine the creation of a DTL.
6. Meaning of permanent difference:-
Any expense recorded in the books but it will not be allowed as deduction in Income Tax Act in subsequent years is called permanent difference.
7. Meaning of temporary difference:-
Any expense recorded in the books but it will not be allowed as deduction in Income Tax Act in the same year but it can be claimed as an expense in succeeding year is called temporary difference.
8. DTA/DTL on permanent difference:
No deferred tax is created in case of permanent difference because there are some expenses which is permanently disallowed under Income tax act.
9. DTA/DTL on temporary difference:
Deferred tax is created in case of temporary difference because there are some expenses which is temporary disallowed under Income tax act.
10. Disclosure in cash flow statement:
It is a non cash transaction & has no impact on cash & bank balances. While preparing the cash flow statement, it will be ignored & amount of net profit will be increased. There is no cash inflow & outflow in deferred tax.
11. Examples of permanent difference:-
| S. No. | Particulars |
| 1 | Payment of employee’s ESI contribution after the due date of payment of ESI |
| 2 | Payment of employee’s PF contribution after the due date of payment of PF |
| 3 | Payment of employee’s LWF contribution after the due date of payment of LWF |
| 4 | Interest paid under the Income tax Act |
| 5 | Penalty paid under any Act |
| 6 | CSR expenditure |
| 7 | Income tax, Surcharge & cess paid under the Income Tax Act |
These are some examples of permanent differences on which no deferred tax will be created because there expenses cannot be claimed as an expense under IT Act in subsequent years.
12. Examples of temporary difference:-
| S. No. | Particulars |
| 1 | Payment of employer ESI contribution after the due date of ITR |
| 2 | Payment of employer PF contribution after the due date of ITR |
| 3 | Payment of employer LWF contribution after the due date of ITR |
| 4 | Expenses on which TDS is not deducted |
| 5 | Provision for doubtful debts |
| 6 | Provision for gratuity |
| 7 | Provision for leave encashment |
| 8 | Depreciation charged under Companies & IT Act |
| 9 | Preliminary expense |
These are some examples of temporary differences on which deferred tax will be created because there expenses cannot be claimed as an expense in the same year but can be claimed in subsequent years.
13. Entry of DTA:-
- DTA is an income.
- It will be credited in P&L A/c.
- Entry will be: DTA Dr.
To P&L A/c
14. Entry of DTL:-
- DTL is an expense.
- It will be debited in P&L A/c.
- Entry will be: P&L A/c Dr.
To DTL A/c
15. Tax rate for calculation of deferred tax:-
For deferred tax calculation, normal income tax rate is considered which is applicable on income under old or new regime.
16. Surcharge rate for calculation of deferred tax:-
- For deferred tax calculation, surcharge will be considered if surcharge is applicable on taxable income under old regime.
- For deferred tax calculation, surcharge will always be considered because surcharge is always applicable on taxable income under new regime.
17. Cess rate for calculation of deferred tax:-
- For deferred tax calculation, cess will always be considered because it is always applicable on taxable income under old regime.
- For deferred tax calculation, cess will always be considered because it is always applicable on taxable income under new regime.
18. Disclosure in balance sheet:-
- Deferred tax asset is a non-current assets.
- Deferred tax liabilities is a non-current liabilities.
- If DTA exceeds the DTL, the net amount will be shown under non-current assets.
- If DTL exceeds the DTA, the net amount will be shown non-current liabilities.
19. Practical situations:
Suppose TDs is not deducted by company on professional fees of Rs. 1,00,000. This amount recorded as an expense in the books but it will not be allowed as an expense in IT Act due to non-deduction of TDs. As a result, expense of Rs. 70,000 only can be claimed & 30,000 will be disallowed.
a. Deferred tax will be created on 30,000. If assesse opts new regime, tax rate will be 22% u/s 115BAA. DT also created @22% on 30,000 i.e 6,600. Surcharge of 10% will also be added along with the cess of 4%. Hence, amount of total DT is 7,550.
| S. No. | Particulars | Amt. |
| 1 | Temporary difference | 30,000 |
| 2 | Deferred tax rate 22% | 6,600 |
| 3 | Surcharge 10% | 660 |
| 4 | Cess 4% | 290 |
| 5 | Total amt. of deferred tax under new regime (DTA) | 7,550 |
b. Deferred tax will be created on 30,000. If assesse opts old regime, tax rate will be 30%. DT also created @30% on 30,000 i.e. 9,000. Surcharge of 7% or 12% will not be added assuming that total income not exceeds 1 crore but cess will be levied @4%. Hence, amount of total DT is 7,550.
| S. No. | Particulars | Amt. |
| 1 | Temporary difference | 30,000 |
| 2 | Deferred tax rate 30% | 9,000 |
| 3 | Surcharge | 0 |
| 4 | Cess 4% | 360 |
| 5 | Total amt. of deferred tax under old regime (DTA) | 9,360 |
The above example has been considered from the point of view of a company, as the assessee.
20. In above case, is it DTA or DTL ?
Answer: In the subsequent year, assesse can claim deduction of 30,000 after deducting TDs on the full amount. This means taxable income in future years will be reduced by 30,000 & profit will be reduced by the same amount. Hence there will be a saving of tax in future & accordingly DTA shall be created. In the year of claim, this DTA shall be reversed.
21. List of transaction falls under deferred tax:-
| S. No. | Particulars | DTA vs DTL |
| 1 | Payment of employee’s ESI contribution after the due date of payment of ESI | No deferred tax |
| 2 | Payment of employee’s PF contribution after the due date of payment of PF | No deferred tax |
| 3 | Payment of employee’s LWF contribution after the due date of payment of LWF | No deferred tax |
| 4 | Interest paid under the Income tax Act | No deferred tax |
| 5 | Penalty paid under any Act | No deferred tax |
| 6 | Payment of employer ESI contribution after the due date of ITR | DTA |
| 7 | Payment of employer PF contribution after the due date of ITR | DTA |
| 8 | Payment of employer LWF contribution after the due date of ITR | DTA |
| 9 | Expenses on which TDS is not deducted | DTA |
| 10 | Provision for doubtful debts | DTA |
| 11 | Provision for gratuity | DTA |
| 12 | Provision for leave encashment | DTA |
| 13 | Depreciation charged under Companies & IT Act | DTA or DTL |
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