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Defferede Tax Liability
Can anybody tell me in detail of Deferred Tax Liability? If possible, please also give some examples.
Regards
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When Book Income is more than taxable Income. Deffered Tax liability is created. Examples are :
Higher tax depreciation
Deferred revenue expenditure, fully tax deductible in current year
Profit on sale of depreciable assets
For details of deferred tax, please refer to Accounting Standard 22 (Accounting of Taxes on Income), issued by the Institute of Chartered Accountants of India. It is available on their web-site as well.

In brief, Deferred Tax Liability of Assets are basically related to recording of taxes on Income in the books of accounts.

You probably know that taxable income is calculated in accordance with tax laws. These calculation may differ from income calculated on the basis of accounting policies applied to determine accounting income.

The differences between taxable income and accounting income can be classified into permanent differences and timing differences.

Permanent differences are those differences between taxable income and accounting income which originate into one period and do not reverse subsequently. This type differences are not carried forward and settled in the year to which they pertain.
Example of permanent differences can be disallowance of certain expenses under the IT Act which may be considered legitimate business expense by the entity or certain exemptions provided under the IT Act.

Timing differences are those differences between taxable income and accounting income for a period that originate in one period and are capable of reversal in one or more subsequent periods.

Only Timing differences that may be properly recorded and carried forward as Deferred Tax Asset or Liability as the case may be and settled in a systematic basis in future.
Example of timing difference can be difference if depreciation charged (may be the rates were different or the method was different, or they ways of calculating was different), or carry forward of losses which can be set-off against future taxable income, when entity pays MAT under section 115JB of the IT Act.

Regards,

Ashutosh Rai
For details of deferred tax, please refer to Accounting Standard 22 (Accounting of Taxes on Income), issued by the Institute of Chartered Accountants of India. It is available on their web-site as well.

In brief, Deferred Tax Liability of Assets are basically related to recording of taxes on Income in the books of accounts.

You probably know that taxable income is calculated in accordance with tax laws. These calculation may differ from income calculated on the basis of accounting policies applied to determine accounting income.

The differences between taxable income and accounting income can be classified into permanent differences and timing differences.

Permanent differences are those differences between taxable income and accounting income which originate into one period and do not reverse subsequently. This type differences are not carried forward and settled in the year to which they pertain.
Example of permanent differences can be disallowance of certain expenses under the IT Act which may be considered legitimate business expense by the entity or certain exemptions provided under the IT Act.

Timing differences are those differences between taxable income and accounting income for a period that originate in one period and are capable of reversal in one or more subsequent periods.

Only Timing differences that may be properly recorded and carried forward as Deferred Tax Asset or Liability as the case may be and settled in a systematic basis in future.
Example of timing difference can be difference if depreciation charged (may be the rates were different or the method was different, or they ways of calculating was different), or carry forward of losses which can be set-off against future taxable income, when entity pays MAT under section 115JB of the IT Act.

Regards,

Ashutosh Rai
Deferred tax liabilities are created when income tax expense is greater than taxes payable (tax return) and the difference is expected to reverse in the future. DTL is the amounts of income taxes which are payable in future periods as a result of taxable temporary differences.
Deferred tax liabilities are created when the amount of income tax expense is greater than the taxes payable. This can happen when the expenses or losses are tax deductible before they are recognized in the income statement.
A good deferred tax liabilities example is when a firm uses an accelerated depreciation method for tax purposes and the straight line method of depreciation for financial reporting. A deferred tax liability keeps into account the fact that the company in the future will pay more income tax because of the transaction that has happened in the current time period for example installment sale receivable.
Let us see the deferred tax liability example.
Below is the company’s income statement for financial reporting purposes (as reported to the shareholders). We have not changed the income and expenses numbers so that to highlight the deferred tax liability concept.
Here we assumed that the Asset is worth $1,000 with a useful life of 3 years and is depreciated using straight-line depreciation method – year 1 – $333, year 2 – $333 and year 3 as $334.
• We note that the Tax Expense is $350 for all the three years.
• Let us now assume that for tax reporting purposes, the company uses an accelerated method of depreciation. The depreciation profile is like this – year 1 – $500, year 2 – $500 and year 3 – $0
• We note that the Tax Payable for Year 1 is $300, Year 2 is $300 and Year 3 is $450.
• As discussed above, when we use two different kinds of depreciation for financial reporting and for tax purposes, it results in deferred taxes.
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