{"id":23044,"date":"2019-08-15T11:30:04","date_gmt":"2019-08-15T06:00:04","guid":{"rendered":"https:\/\/enterslice.com\/learning\/?p=23044"},"modified":"2024-05-23T10:12:04","modified_gmt":"2024-05-23T04:42:04","slug":"deferred-tax-liability-dtl-deferred-tax-asset-dta","status":"publish","type":"post","link":"https:\/\/enterslice.com\/learning\/deferred-tax-liability-dtl-deferred-tax-asset-dta\/","title":{"rendered":"All About Deferred Tax Liability (DTL) & Deferred Tax Asset (DTA)"},"content":{"rendered":"

The deferred tax liability<\/strong> and deferred tax asset are very important components of financial statements. The deferred tax brought into accounts to make a clear picture of current and future tax. It depends upon the nature of transaction whether the Company has paid the advance tax or overpaid tax will be recognized under the deferred tax asset. Whereas, when the tax expense is more compared to tax payable which are payable in the future period will be recognized under the deferred tax liability. The adjustment is made at the end of the year while finalizing the Financial Statement<\/strong><\/a> of the Company.<\/p>\n\n\n\n

How to\nrecognize the Deferred Tax?<\/strong><\/h2>\n\n\n\n

There is a difference between the taxable profit\nand book profit because there are certain items which are allowed or disallowed\nfor the tax purpose. <\/p>\n\n\n\n

Here are two types of difference which are created known as timing difference it can be either:<\/strong><\/p>\n\n\n\n

    \n
  1. Temporary Difference:\nDifference between book income and taxable income which can be adjustable in the\nsubsequent period. Temporary Difference may be either:<\/li>\n\n\n\n
  2. The Taxable\ntemporary difference or<\/li>\n\n\n\n
  3. Deductible\ntemporary difference.<\/li>\n\n\n\n
  4. Permanent\nDifference: Difference between book income and tax income which are not\nadjustable in the subsequent period.<\/li>\n<\/ol>\n\n\n\n

    Deferred tax is recognized through a Temporary and Permanent difference<\/strong>. The effect has been given in the financial statements either through deferred tax asset or deferred tax liability depending upon the nature of the transaction. Deferred tax is only recognized if there is a future possibility. It should be kept in mind that Deferred Tax Asset and Deferred Tax Liability<\/strong> are created only for the temporary difference because for the permanent difference it is not created as they are not going to be reserved.<\/p>\n\n\n\n

    Types of\nDeferred Tax<\/strong><\/h2>\n\n\n\n

    Deferred Tax Asset<\/strong><\/h4>\n\n\n\n

    It means when an asset on a Company’s balance sheet that may be used to reduce the taxable income. It refers to the situation where the Company has paid more tax or advance tax<\/strong>[1]<\/a><\/sup>.<\/p>\n\n\n\n

    Deferred Tax Liability<\/strong><\/h4>\n\n\n\n

    It means the Company has deducted the tax less\ncompared to tax payable and it signifies that Company may pay in future more\nincome tax.<\/p>\n\n\n\n

    \"INCOME<\/a><\/figure>\n\n\n\n

    Let’s\nunderstand through an example<\/strong><\/p>\n\n\n\n

    Deferred\nTax Asset:<\/strong> The Company has a book\nprofit of Rs. 1500 and this includes bad debt of Rs. 500. For Tax profit, bad\ndebt will be allowed in the future when it is required actually to be written\noff. Hence taxable income after disallowance will be Rs. 2000 and the income\ntax rate is 30% then the entity will pay taxes on Rs. 2000 i.e. (2000*30%) Rs.\n600.<\/p>\n\n\n\n

    If the bad debts were not disallowed, the entity\nwould have paid tax on Rs. 1500 i.e. (1500*30%) Rs 450. For additional Rs. 150\nwhich is already paid now and Deferred Tax Asset to be created.<\/p>\n\n\n\n

    Deferred\nTax Liability:<\/strong> When the\ndepreciation rate per income tax is higher than the depreciation rate per\nCompanies Act, the entity will end up paying less tax for the current period.\nThis will create a deferred tax liability. It is created under the head of\nNon-current Liability.<\/p>\n\n\n\n

    Purpose:<\/strong><\/p>\n\n\n\n

    The main purpose of Deferred Tax asset and Deferred\nTax Liability is to make the appropriate presentation in financial statements\nand to keep the transparency so that the stakeholder aware of the tax situation\nof the Company.<\/p>\n\n\n\n

    Disclosure:<\/strong><\/p>\n\n\n\n

      \n
    1. The Company\nshould setoff assets and liabilities representing the current tax if the\nCompany:<\/li>\n\n\n\n
    2. Legally\nenforceable has the right to set off the recognized amounts.<\/li>\n\n\n\n
    3. Intends to set\noff the asset and liabilities on a net basis<\/a>.<\/li>\n\n\n\n
    4. The Company\nshould set off the deferred tax assets and deferred tax liabilities if the\nCompany:<\/li>\n\n\n\n
    5. Legally\nenforceable has a right to set off against liabilities representing current tax\nand<\/li>\n\n\n\n
    6. Deferred tax\nassets and the deferred tax liabilities relate to taxes on income levied by the\nsame government authority.<\/li>\n\n\n\n
    7. The Major\ncomponent of tax expense to be separately disclosed such as:<\/li>\n\n\n\n
    8. Current Tax\nExpense<\/li>\n\n\n\n
    9. Prior period\nadjustment<\/li>\n\n\n\n
    10. Deferred Tax\nexpense\/income<\/li>\n<\/ol>\n\n\n\n
      Notes:<\/strong> Deferred Tax Asset and Deferred Tax Liabilities should be disclosed under a separate heading i.e. Current Assets and Current Liability respectively in the Balance Sheet of the Company.<\/div>\n\n\n\n

      Exemptions\nof items not included while calculating the Deferred Tax<\/strong><\/p>\n\n\n\n

      A deferred tax asset or liability is not recognized if that deferred tax arises from:<\/strong><\/p>\n\n\n\n