ALL ABOUT DEFERRED TAX LIABILITY

  • Blog|Income Tax|
  • 2 Min Read
  • By Taxmann
  • |
  • Last Updated on 14 July, 2022

Recent Posts

Blog, News, Company Law

[Opinion] Company & Its Directors Penalized for Using Private Placement Funds in Existing Account Before Filing Return of Allotment

Blog, News, Company Law

SEBI Amends Buy-Back Regulations | Excludes Shares Held by Non-Participating Promoters from Entitlement Ratio

Latest from Taxmann

WHAT IS DEFERRED TAX LIABILITY?

Deferred tax liability refers to the liability that arises when profit as per books of account is more than taxable profit due to timing differences.
 
While computing taxable income as per the provisions of Income Tax Act, 1961, there may be certain expenditures that are allowed for deduction wholly in the year in which such expenditures were incurred, but in the financial books such expenditures are allowed over a period of time. The timing difference of amortizing such expenditures brings differences in book profit and taxable profit (i.e. the book profit becomes more than taxable profit). However, the benefit of such deduction while calculating taxable income gets reversed in the subsequent years where financial books amortise such expenditure and no treatment is done for such expenditures while calculating taxable income for the obvious fact that benefit of same has already been availed in the previous year. The accounting for such probable reversal of tax, taking into consideration the concept of MAT, leads to creation of deferred tax liability. 
For example,
 
Substantial Advertisement expenses – The benefit of expenses incurred on the advertisement of products/services extents to subsequent years also. Since, their benefit extends to subsequent years, they are amortized accordingly in the books of account. However, while computing taxable income as per tax laws, the amount of expenses incurred are allowed wholly for deduction. Such expenses are known as Deferred Revenue Expenditure that are accountable for time differences.

Illustration: (Deferred Tax Liability calculation):

Mr. X spent Rs. 3 Crores on advertisement of a newly launched product in the year 2017-18. His team forecasts that this advertisement will earn them benefit for 3 years. This amount of Rs. 3 crores shall be treated as: 

 

Year I

Year II

Year III

Expenses as per Income Tax Laws

Rs. 3 Crores

0

0

Expenses as per Financial Books

Rs. 1 Crore

Rs. 1 Crore

Rs. 1 Crore

 

Assuming, the tax rate to be 30%, Mr. X has to pay Rs. 60,00,000/- (Rs. 2 Crores * 30%) less year I. However, in Year II he shall not get the benefit of tax on the expenses of Rs. 1 Crore amortized in Year II and Year III subsequently because the benefit of same was availed in Year I wholly. This benefit of amount of Rs. 60,00,00/- will get eliminated in the Year II and Year III and has to be accounted for in Year I by way of creating deferred tax liability account. 
 

Also Read: Deferred Tax Asset

Deferred Tax Liability in case of loss:

When the books of accounts reflect profit for the period under consideration but there is loss as per the provisions of tax laws due to timing difference, then in that case also, the deferred tax liability is required to be recognized and carried forward to subsequent years.

No consideration to time value of money:

It is important to note that as per deferred tax accounting standard, amount of deferred tax shall not be discounted to its present value. Hence, while doing deferred tax calculation, the time value of money is ignored. 

 

Disclaimer: The content/information published on the website is only for general information of the user and shall not be construed as legal advice. While the Taxmann has exercised reasonable efforts to ensure the veracity of information/content published, Taxmann shall be under no liability in any manner whatsoever for incorrect information, if any.

Comments are closed.

«
»

Everything on Tax and Corporate Laws of India

To subscribe to our weekly newsletter please log in/register on Taxmann.com

Author: Taxmann

Taxmann Publications has a dedicated in-house Research & Editorial Team. This team consists of a team of Chartered Accountants, Company Secretaries, and Lawyers. This team works under the guidance and supervision of editor-in-chief Mr Rakesh Bhargava.

The Research and Editorial Team is responsible for developing reliable and accurate content for the readers. The team follows the six-sigma approach to achieve the benchmark of zero error in its publications and research platforms. The team ensures that the following publication guidelines are thoroughly followed while developing the content:

  • The statutory material is obtained only from the authorized and reliable sources
  • All the latest developments in the judicial and legislative fields are covered
  • Prepare the analytical write-ups on current, controversial, and important issues to help the readers to understand the concept and its implications
  • Every content published by Taxmann is complete, accurate and lucid
  • All evidence-based statements are supported with proper reference to Section, Circular No., Notification No. or citations
  • The golden rules of grammar, style and consistency are thoroughly followed
  • Font and size that's easy to read and remain consistent across all imprint and digital publications are applied