What Is a Deferred Tax Liability?

Deferred tax asset items as well as deferred tax liability items are a prominent aspect of every company’s financial statements. This difference in timings of both, gives rise to certain variance in the company’s accounting. The most generic forms of deferred tax are Deferred Tax Asset and Deferred Tax Liability.

Deferred Tax Asset

Deferred tax assets originate when the amount of tax has either been paid or has been carried forward but it has still not been acknowledged in the statement of income. The actual value of the deferred tax asset is generated by comparing the book income with the taxable income. The biggest benefit of the deferred tax asset is that it causes the company’s tax liability to go down tremendously in the future.

The conditions that cause origin of deferred tax asset are as follows:

• The taxing authority takes the expenses into account much before time.

• A tax on the revenue earned is levied before time.

• There is a difference in tax rules for asset and liabilities.

Deferred Tax Liability

Deferred tax liabilities, on the other hand originate when a company underpays the amount of taxes due, which it would eventually pay in the future. It should be remembered, however, that underpaid does not mean that they have not fulfilled their tax-duties, it’s just that the taxes would be paid on a different timescale. It is a tax to be paid in future. In simple words, deferred tax liabilities are the opposite of deferred tax asset, which occur when the taxable income is lesser as compared to the income mentioned in the income statements of the company.

The conditions that cause origin of deferred tax liability are as follows:

• In order to showcase great profits to the shareholders, the companies often push their profits.

• When companies keep more than one copies of the financial statement, for their own personal use or for furnishing the same to tax authorities. This is called dual accounting.

• Sometimes companies also push the current profits into future, this gives them the opportunity to decrease the tax amount. By doing this instead of paying the saved money as taxes, they use that extra money for making investments.

Let us now discuss the Deferred Tax Liability, for the same ABC Company that produces washing machines. It is assumed by the company that the manufacturing machine that costs around INR 60,000 will work for about 3 years and would pay 30% on the profits earned. It has to be remembered here that when the annual accounting of finances is done, INR 20,000 will be accounted for the coming three years. Therefore, the annual income will decrease INR 20,000 and there will be a tax deduction of INR 9,000, and this originates a tax liability of INR INR 3,000.

A tax holiday is an incentive scheme that is given to companies by the government. It offers a kind of tax reduction or in some cases elimination. Occasionally used for the reduction of taxes, it is a strategy used for new enterprises that are getting established in the free trade zone. With the aim of encouraging production and consumption of certain goods and items, the government discards certain taxes for a provisional period, depending on various conditions.

It should be kept in mind that the deferred tax from the difference in timing that cause a reversal during the tax holiday duration should not be regarded during the enterprise’s tax holiday period. Deferred tax that is related to the differences in time that causes a reversal after the tax holiday should be calculated in the year that it originated.