1. K.G.Acharya & Co., Chartered Accountants
“Deferred Tax”
Deferred Taxes are ‘Income Tax’ which arise in one period but because of Timing Difference will have to be actually paid in later years.
K.G.Acharya & Co., Chartered Accountants

2. K.G.Acharya & Co., Chartered Accountants
Timing differences -TD- Differences between TI and AI for a period that originate in one period and are capable of reversal in one or more subsequent periods.
Permanent differences -PD- are the differences between TI and AI for a period that originate in one period and do not reverse subsequently.
K.G.Acharya & Co., Chartered Accountants

3. “Deferred Tax ” Deferred Tax Taxable Income Current Tax Tax Expense
As per IT Return
Rs. 70 cr
Current Tax
(applicable rate/law)
Tax
Expense
Accounting
Income
As per P&L A/c
Rs. 100 cr
Deferred Tax
(substantively enacted
rates /law) Average rate ?
Timing
Difference
Rs. 20 cr
Permanent
Difference
Rs. 10 cr
No Tax effect
K.G.Acharya & Co., Chartered Accountants

4. K.G.Acharya & Co., Chartered Accountants
“Deferred Tax ”
Accounting
Income
As per P&L A/c
Rs. 80 cr
Taxable
Income
As per IT Return
Rs. 90 cr
Current Tax
Timing
Difference
Reversal or DTA
Rs. 20 cr
(DTL) or
DTA Prudence
Permanent
Difference
Rs. 10 cr
No Tax effect
K.G.Acharya & Co., Chartered Accountants

5. K.G.Acharya & Co., Chartered Accountants
DTA v/s DTL
Accounting Income > Taxable Income
Create DTL
Accounting Income < Taxable Income
Reversal of DTL or Creation of DTA s.t PRUDENCE
Accounting Income = Taxable Income
Neither DTA nor DTL
Accounting Loss = Taxable Loss
Create DTA subject to PRUDENCE
K.G.Acharya & Co., Chartered Accountants

6. K.G.Acharya & Co., Chartered Accountants
Scope of AS 22
Taxes on income include all domestic and foreign taxes, which are based on taxable income
Does not cover Dividend Distribution Tax.
K.G.Acharya & Co., Chartered Accountants

7. K.G.Acharya & Co., Chartered Accountants
Recognition of Deferred Tax Asset Consideration of PRUDENCE is a must while recognizing DTA
DTA Arising due to
Basis of Recognition
Unabsorbed Business & Depreciation Loss
Virtual Certainty (Judgment) &
Convincing Evidence (Fact)
ASI 9
Other than above
Reasonable Certainty
K.G.Acharya & Co., Chartered Accountants

8. Presentation of DT Balance Sheet (ASI-7)
Share capital
Reserves
Secured loans
Unsecured loans
Deferred tax liability
Total
Fixed assets
Investments
Deferred tax asset
Net Current Assets
K.G.Acharya & Co., Chartered Accountants

9. K.G.Acharya & Co., Chartered Accountants
Disclosure
Break-up of major components of DTA / DTL to be disclosed.
DTA and DTL to be set off if permissible under tax laws but to be shown separately otherwise.
Evidence supporting the recognition of DTA to be disclosed, if an enterprise has Unabsorbed Depreciation / Tax Losses to be carried forward.
K.G.Acharya & Co., Chartered Accountants

10. Presentation of CT - Para 27
An Enterprise should offset assets and liabilities representing current tax if the enterprise:
a) has a legally enforceable right to set off the recognized amounts; and
b) intends to settle the asset and the liability on a net basis
K.G.Acharya & Co., Chartered Accountants

11. Timing Difference – Ex….
Expenses Dr. to P & L A/c on accrual basis but allowed on actual payment.
Payments made without TDS, but disallowed for tax purposes u/s 40(a)(i) / (ia) and allowed when relevant tax is deducted & paid subsequently
Expenditure U/s 43B of Income Tax Act
Provision for Gratuity u/s 40A(7)
Provisions made in the P&L A/c in anticipation of liabilities – allowed when liabilities crystallize
K.G.Acharya & Co., Chartered Accountants

12. K.G.Acharya & Co., Chartered Accountants
Timing Difference – Ex..
Provision for doubtful debts / advance
Provision for warranties
Preliminary expenses written off fully when incurred (U/s 35D)
Expenses amortized in books of Accounts over a period of years but a shorter or longer period is allowable for tax purposes
K.G.Acharya & Co., Chartered Accountants

13. Permanent Difference – Ex...
Amortization of goodwill considered as disallowable expense
Personal expenditure disallowed by tax authorities
Penalty (Not being compensatory)
Payments disallowed U/s 40(A)(3)
Donations disallowed U/s 80G
Remuneration to partners disallowed U/s 40(b)
Scientific research expenditure.(only weighted element)
Exemptions u/s 10/10A/10B
Deductions U/s 80IA / IB / IC
Financial Lease - Circular No. 2 (dtd. 9th Feb 2001 – post AS 19 tax position)
Additional Depreciation on Revaluation
K.G.Acharya & Co., Chartered Accountants

14. Financial Implication of Deferred Tax:
(1) Effect of Deferred tax on Income Tax
Effect on Current Ratio
Affects Net Worth – Thereby affecting
- Limits under Companies Acceptance of Deposits Rules
- Eligibility to make investments
- Determination of Sickness for BIFR purposes
(4) Affects Debt -Equity Ratio and TOL / TNW
(Double edged sword)
K.G.Acharya & Co., Chartered Accountants

15. K.G.Acharya & Co., Chartered Accountants
(6) Affects Net Profit Ratio (PAT/Net Sales)
(7) Affects EPS
Affects Dividend declaration - No specific reference in the Company Law on DT.
(PBT loss V PAT Profit position – Impact on dividend and Audit report)
(9) Affects Capital Adequacy Norms in case of banks (Tier-I & Tier-II Capital) - Capital to Risk Weighted Assets Ratio (CRAR)
K.G.Acharya & Co., Chartered Accountants