Deferred tax in Schedule III balance sheet

Deferred tax refers to a situation where there is a difference between the tax expense shown in the financial statements and the actual tax payable to the tax authorities. This difference arises due to temporary differences between the accounting treatment of certain items and their treatment under tax law.

Key Concepts:

1. Temporary Differences:
   • These are differences between the carrying amount of an asset or liability in the balance sheet and its tax base. These differences will reverse over time, meaning that the temporary differences that cause deferred tax today will be eliminated in future periods.
2. Deferred Tax Liability (DTL):
   • This occurs when taxable income is lower than the accounting income due to temporary differences. It represents taxes payable in the future due to these temporary differences.
3. Deferred Tax Asset (DTA):
   • This arises when accounting income is lower than taxable income due to temporary differences, leading to taxes being paid upfront that will be recoverable in the future.

Common Causes of Deferred Tax:

• Depreciation Methods: Differences in depreciation methods or rates used for accounting and tax purposes can lead to deferred tax.
• Provision for Doubtful Debts: If a company makes a provision for doubtful debts in its accounts but these are not immediately deductible for tax purposes, it may lead to a deferred tax asset.
• Carry Forward of Losses: Losses carried forward for tax purposes that can be set off against future taxable profits can lead to a deferred tax asset.
• Revenue Recognition Differences: Timing differences between when revenue is recognized for accounting purposes and when it is recognized for tax purposes can create deferred tax.

Accounting for Deferred Tax:

• Indian Accounting Standard (Ind AS) 12 / IAS 12: These standards provide guidelines on accounting for income taxes, including deferred taxes. Under these standards, deferred tax is recognized for all temporary differences, subject to certain exceptions.
• Disclosure: Deferred tax assets and liabilities are usually disclosed in the financial statements under non-current assets and non-current liabilities, respectively.

Example:

• If a company uses the straight-line method of depreciation for accounting purposes and the written-down value method for tax purposes, the accounting profit will initially be higher than the taxable profit. This difference creates a deferred tax liability, as the company will pay less tax now but more in the future as the difference reverses.

LedgerFusion provides option for calculation of Deferred tax while preparation of schedule III balance sheet.

User needs to provide necessary input for calculation of depreciation asper Companies Act 2013 and As per Income Tax Act 1961

Based on user inputs LedgerFusion prepares respective depreciation schedules.

LedgerFusion provides detailed Deferred tax calculation schedule as follows

Understanding deferred tax is crucial for accurate financial reporting and tax planning, as it ensures that the tax effects of temporary differences are appropriately recognized in the financial statements.