Meaning of Deferred Tax Liability & Asset in Simple Words

In Simple words, Deferred Tax Liability is a Provision for Future Taxation.

This is in stark Contrast to Provision for Taxation. Provision for Taxation is basically a provision for Current year Taxation.

Deferred Tax Liability arises due to timing difference in the value of Assets as per Books of Accounts and as per Income Tax Act.

Also we can say that Deferred Tax Liability/Asset arises due to the difference between Profit as per Books of Accounts (P&L Account) and profit as per Income Tax Act. (Taxable Income).

Depreciation is the main reason for difference in the profits as per books of Accounts and Taxable profits as per Income Tax Act. Both Income Tax Act and Companies Act prescribe different rates of Depreciation for different categories of Assets.

Let me illustrate with a simple example. Suppose a Company purchases a Wind Turbine Generator (Windmill). The Depreciation which can be claimed in the Books of Accounts in as per Companies Act is let's say 20% (assumed). The Depreciation as per Income Tax Act is 80% for Windmill.

Now a Windmill is purchased for Rs. 10,00,00,000/- (10 Crores). The Depreciation Claimed in the First year is:

Value of Windmill: Depreciation as per Books of

10,00,00,000 X

10,00,00,000/2,00,00,000/-

Accounts: 20%= Depreciation as per Income Tax 10,00,00,000 X Act: 80%= DIFFERENCE DEFERRED TAX LIABILITY @ 30.9%

8,00,00,000/-6,00,00,000/-1,85,40,000/-

(Deferred Tax Liability is created at the highest Marginal Rate of Tax i.e. 30.9%)

What is the Meaning of Creating this Deferred Tax Liability of Rs. 1,85,40,000/- (One Crore eighty five lakhs forty thousand)

It simply means that the company will definitely have a tax Liability of that much in the future years. This is because in the years to come the Depreciation as per Income Tax Act will be lesser that the Depreciation as per Books of Accounts. Hence in these years the Company will have to create a Deferred Tax Asset

For clarity the Following Table is provided. Let's take the figures in Lakhs for Easier Understanding:

Let Windmill Value be Rs. 100,000/-

Year Dep as per IT Act (80% WDV) Dep as Books (20% SLM) OF per

5*

TOTAL

80,000 16,000 3,200

640

160

100,000

20,000 20,000 20,000

20,000

20,000

100,000

DIFFERENCE 60,000 -4,000 -16,800 -19,360 -19,840 0 DTL/DTA @ 18,540 -1,236 0 30.9% 5,191.20 5,982.24 6,130.56

Note * In year 5 as per Income tax act let's assume the entire Remaining Balance is written off

CONCLUSIONS:

1. In Year 1 Deferred Tax Liability amounting to Rs. 18,540/- has to be created. This means that in Year 1, the company has postponed its tax Liability of Rs. 18,540/- to the Future years. This Liability will come back to the company one day or the other. (Unless 80 IA is claimed)

2. In Year 2, as you can clearly see the Depreciation as per Books has gone up. This means that Depreciation as per IT act will be lesser as a result the profit as per IT Act will be more and as a result the company has to pay Rs. 1236/- more tax during this year.

3. Thus in the remaining years the company will have Deferred Tax Assets And the Deferred Tax Liability created in the first year will be reversed in the subsequent 4 years.

4. Thus when the WDV of Assets as per Books and WDV as per IT Act both become ZERO, there is neither Deferred Tax Liability nor Deferred Tax Asset as there is no timing Difference

Deferred Tax is purely an accounting Concept. AS 22 - "Accounting for Taxes on Income deals with Deferred Tax.

The following are the Accounting treatment and Tax treatment of Deferred Tax:

ACCOUNTING ENTRIES:

P&L A/c Dr 18,540.00 To Deferred Tax Liability A/c 18,540.00

(Being Deferred Tax Liability created in Year 1 at the Maximum Marginal Rate of Tax)

Deferred Tax is shown under Provisions in Balance Sheet.

Deferred Tax Asset Dr To P & L A/c

1,236.00 1,236.00

(Being Deferred Tax Liability Reversed in Year 2)

Finally at the end of Year 5 the Balance Sheet will be thus:

PROVISIONS: Rs.Ps Deferred Tax Liability Less: Reversed upto year 4 Reversed in year 5 18,540 12409.44 6130.56 18,540 0

TAX TREATMENT:

INCOME FROM BUSINESS:

XXX

Net Profit as per P&L A/c

Add: Deferred Tax Liability Less: Deferred Tax Asset

XXX XXX

Note: As Deferred Tax Liability is a Provision, it should be disallowed as an expense. Also deferred tax asset should be deducted from Income.

As seen from the above, deferred tax liability/asset does not affect tax computation.

PURPOSE: The Purpose of DTA/DTL: More appropriate presentation of financial statements and to make the various stakeholders aware of the tax situation of the company.

It may be noted that 80-IA (Section 80 IA of IT Act) exemption may be availed for Windmill. That is if the company starts to claim 80-IA benefit after 5 years (80-IA benefit can be claimed in any 10 Assessment years out of 15 A.Y's after buying windmill), then there will be more benefits to the company as the Income in the first 5 years will be low and the company can claim business loss as there will be huge Depreciation as per IT.

PART II: In the next part, I will explain the how deferred tax should be computed if 80IA exemption is availed for Windmill having useful life of more than 5 years. Also I will explain the other items which cause a difference in profits as per Books and IT Act. Also I will explain how to deal with brought forward losses.

HOPE IT WAS AN INTERESTING READ.

REGARDS VIGGI

(I work as an Articled Assistant for a firm in Mangalore and the Information gained was during the course of my work.)

Source : Various Text Books on Accounting Standards & Own Research -

Deferred Tax in Simple Words - PART II

The Day is 1st of April 2001; the Indian Accounting Fraternity is introduced to the concept of Deferred Tax.

Accounting for Taxes on Income (AS 22) is applicable to different categories of enterprises from different dates.

TABLE 1:

Levels of Enterprises All Types of Companies Level I Level 2 Level 3

Applicable with effect from As per Companies (AS) Rules 2006 01-04-2001 01-04-2002 01-04-2006

Before we proceed any further, it is very essential to know the meaning of Level 1,2,3 Enterprises.

LEVEL 1 ENTERPRISES:

Enterprises, which fall in any one or more of the following categories, at any time during the accounting period, are classified as Level I enterprises:

i) Enterprises whose equity or debt securities are listed whether in India or outside India.

ii) Enterprises, which are in the process of listing their equity or debt securities as evidenced by the board of directors resolution in this regard.

iii) Banks including co-operative banks.

iv) Financial Institutions

v) Enterprises carrying on insurance business.

vi) All commercial, industrial and business reporting enterprises, whose turnover for the immediately preceding accounting period on the basis of audited financial statements exceeds Rs. 500 million. Turnover does not include other income.

vii) All commercial, industrial and business reporting enterprises having borrowings, including public deposits, in excess of Rs. 100 million at any time during the accounting period.

viii) Holding and subsidiary enterprises of any one of the above at any time during the accounting period.

LEVEL2 ENTERPRISES:

Enterprises, which are, not Level I enterprises but fall in any one or more of the following categories are classified as Level II enterprises;

i) All commercial, industrial and business reporting enterprises, whose turnover for the immediately preceding accounting period on the basis of audited financial statements exceeds Rs. 4 million, but does not exceed Rs. 500 million. Turnover does not include other income.

ii) All commercial, industrial and business reporting enterprises having borrowing, including public deposits, in excess of Rs. 10 million but not in excess of Rs. 100 million at any time during the accounting period.

iii) Holding and subsidiary enterprises of any one of the above at any time during the accounting period.

LEVEL 3 ENTERPRISES:

Enterprises, which are not covered under Level I and Level II are considered as Level III enterprises.

CASE STUDY:

Mr. V runs a small scale business unit by the name of V Company LTD. It is an existing business. His business is in the development stage. But Since 2006, AS 22 is applicable to him, he has to ascertain his accumulated balance of Deferred tax liability/Asset as on 1st of April 2006.

He is advised by Mr. P, his CA as follows:

Deferred Tax was introduced in accordance with the matching concept which states that the income of the year should be matched with the expenses incurred during the year. Since Income tax forms a significant portion of the expenses, it became very essential to match the current year taxes against current year Income.

Since the concept is new to this Enterprise, you have to first ascertain the Opening balance of Deferred Tax Liability or Asset

Naturally the question Mr. V had was how to ascertain the Opening balance of Deferred Tax Asset/ Liability.

Mr. P replies as follows- It is the Difference between the Value of Assets as per Books of Accounts and the Value of Assets as per Income Tax Act.

To Illustrate, let me give an example. Think that you have Fixed Assets worth Rs. 10 Crore as of today, i.e the Book Value of Assets as on 1st April 2006 is Rs. 10 Crore. And the written down value as per Income Tax Act is Rs. 7 Crore. Then the Opening Balance of Deferred Tax Liability is 0.927 Crores i.e (10-7)*30.9%. Deferred Tax Liability is created at the highest marginal Rate of Tax.

The meaning of creating this deferred tax liability is that the Company will have a tax liability of 0.927 Crores in the future because the Depreciation as per Income Tax Act will be less in the future years, thus profit as per IT Act will be higher leading to a higher taxation. (WDV remaining to be written off as per IT Act only 7 crores as compared to 10 Crore as per Books of Account)

The above Computation is true only if Depreciation is the only timing Difference.

For this purpose, it is also important to know what Permanent Difference and temporary difference (timing difference) means:

From the above, it is clear that Deferred Tax Liability arises due to some items which cause a difference between the profits as per P&L A/c (Net profit) and profit as per Income tax act (taxable Income)

Permanent Differences

1. One Classic example of permanent difference is Cash Payment in Excess of Rs. 20,000. The item is debited to P&L A/c. But for Income Tax purposes it is disallowed as an expense under section 40(A)(3). In this case there is no chance of Reversal in the Subsequent years, Hence this item is a permanent Difference.

2. Another Example of Permanent Difference is Exemption is claimed for a particular Income U/s 80-IA of the IT Act. This profit will not be taxed in the future years. Hence it is a permanent Difference.

Temporary Differences

Bonus Payable of Rs. 50,000/- to employees is debited to P&L A/c but the Bonus is not disbursed to employees before the due date of filing the return. This expense will be disallowed as per IT Act U/s 43B. Hence it wont be allowed as a deduction under the IT Act thus increasing the Taxable income as per IT Act. But this item is capable of Reversal in the future years. The Bonus will be allowed as expense under the IT Act in the year in which it is paid, thus resulting the Tax Profits to go down during that year.

Important: Please note that only temporary differences result in Deferred Tax Asset/Liability.

Now consider this situation: The Opening position of Mr. Vs business as on 1st April 06 is as follows.

TABLE 2:

Value of Assets as per Books of 10 Crores Account WDV of Assets as per Income 7 Crores Tax Act Unabsorbed Depreciation as per 2 Crores IT Act Unpaid Bonus of FY 2005-06 0.5 Crores (Paid on 31st December 2006)

Now the Deferred Tax Liability has to be carefully ascertained after considering the Tax Assets of the Company.

TABLE 3:

Computation of Opening Balance of Deferred Tax Liability:

Value of assets as per Books WDV as per IT Act Deferred Tax Liability to be created on: Less : Deferred Tax Assets on Account of : a) Unabsorbed Depreciation b) Unpaid Bonus

In Crores 10 7

In Crores

3 2 0.5 2.5

Deferred Tax Liability created @ 30.9% on 0.5 Crores (0.5*30.9%)

0.1545

1. Deferred Tax Asset (i.e a tax asset or something which reduces taxes in future years) on account of Unabsorbed Depreciation and bonus arises since if the company is called to pay tax on 3 Crores (WDV Difference) it can always set off the Unabsorbed Depreciation and claim the Bonus as expenses under Income from Business, thus reducing current year taxes. Hence it is an tax asset.

2. In theory, if there are no timing differences on any given date, then the Deferred Tax Balance should be ZERO.

We will test this theory.

FINANCIAL YEAR 2006-07

Consider the following events in the F.Y 2006-07

1. The Depreciation as per Books is 3 Crore. The Depreciation as per IT Act is NIL. (Assumed). Thus as on 31st of March 2007, there is no timing difference

2. The unpaid bonus is entirely paid

3. Unabsorbed Depreciation is fully set off against Income from Business.

The Deferred Tax Computation will be as follows:

TABLE 4:

In Crores In Crores Disallowed Under Income tax Act: Depreciation as per Books of Accounts 3 Total 3 Less: Deductible Under the IT Act i) Depreciation as per IT Act 0 ii) Unabsorbed Depreciation 2 iii) Unpaid Bonus of F.Y 2005-06 paid during F.Y 0.5 2.5 2006-07 Difference 0.5 Deferred Tax Liability Reversed (0.5*30.9%) 0.1545 Less: Opening balance of Deferred Tax 0.1545 Liability Balance as on 31st March 2007 0.00

1. This technique can be followed for Calculating Deferred Tax: First write all expenses which are Disallowed for Income Tax purposes. Then write down all expenses which are allowed for IT purposes. If the difference is positive, then create Deferred Tax Asset/Liability Reversal. If the amount is negative, the create deferred tax liability.

2. When there is no timing difference i.e Dep. as per IT and Books are equal, No Unabsorbed Dep, No Bonus remaining to be paid, there will be NIL DTA/DTL.

Accordingly Mr. V passes the entries in his Books of Account.

1. Deferred Tax Liability should be debited to the P&L account as a provision and should be shown as a separate item after Unsecured Loan in Balance Sheet.

2. Deferred Tax Asset should be credited to P&L Account and shown in the Asset side below Investments.

3. Please Refer the Revised Schedule VI for latest classification

FINANCIAL YEAR 2007-08

Now in the F.Y 2007-08, the following events occur:

1. Mr. V buys a Machine used for Scientific Research Rs. 2 Crores related to his business which qualifies for Deduction under Section 35 at the rate of 100% in the first year. However the Useful life of the Machine is 5 years.

2. As on 31st March 2008, a Bonus Payable to workers entry is passed at 20% of Wages for each worker aggregating to the tune of Rs. 75,00,000/-. This amount is unpaid till the date of filing the Return of Income.

3. Consultancy Fees is paid to a Non Resident in connection with his business to the tune of Rs. 20,00,000/-. But TDS has not been made on the above till the due date of filing the Return of Income.

4. Cash Expenses of Rs. 50,000 has been paid on a single transaction.

5. Provision for Retirement Benefit (Gratuity and Leave Encashment) of Staff has been passed to the tune of Rs. 1,50,00,000/-. This liability may arise in the future.

6. A Term Loan has been borrowed from a Bank. But the repayment starts 3 years later. In other words there is a moratorium on the Repayment. But V has made a Provision for accrued interest on term loan of Rs. 80,00,000/-.

7. Depreciation (excluding Scientific Research Equipment) as per Books of Accounts comes to Rs. 2 Crores

8. Depreciation as per Income tax Act (Excluding Scientific Research Equipment) comes to Rs. 4 Crore.

9. The Net Profit as per P&L A/c of the Company comes to Rs. 95,00,000/-

TABLE 5:

COMPUTATION OF DEFERRED TAX AND TAXABLE INCOME DEFERRED TAXABLE TAX INCOME Net Profit as per P&L Account 95,00,000 ADD: Expenses Disallowed as per IT Act (Only Timing Differences) 1. Depreciation as per Books 2. Depreciation in Books for Scientific Equipments - 20% 3. Interest on Term Loan - Provision for Accrued Interest 4. Provision for Retirement Benefit of Staff 5. Consultancy Fees (TDS not deducted) 6. Unpaid Bonus of the F.Y 2007-08 TOTAL LESS: Expenses Deductible under the Income Tax Act 1. Depreciation as per Income tax act 2. Depreciation on Scientific Equipment 2,00,00,000 40,00,000

80,00,000

1,50,00,000

20,00,000 75,00,000 5,65,00,000

4,00,00,000 2,00,00,000

- 100% TOTAL Difference Deferred Tax Liability @ 30.9% ADD: Permanent Differences: Cash Payments exceeding Rs. 20,000/TAXABLE INCOME AS PER IT ACT 6,00,00,000 -35,00,000 -35,00,000 -10,81,500 50,000 60,50,000

NOTES:

1. Depreciation on Scientific Research Equipment is a temporary difference as in the subsequent years the Depreciation on Scientific research equipment as per IT Act will be NIL, but the Depreciation as per Books will continue till the day the equipment is fully depreciated. Hence any difference in the value of asset for Tax and Accounting purpose is purely temporary.

2. Interest on term loan in debited as an expense in the P&L A/c but for tax purposes the Interest will be allowed as deduction only on actual payment under section 43B. Thus it is only a matter of time before it is allowed as an expense. Hence it is currently a tax asset. Because it will yield future tax benefits.

3. Like all Provisions, Provision for Retirement Benefits to staff will be disallowed as an expense for tax purpose since it is merely a provision, The expense will be allowed as deduction when the Gratuity or Leave Encashment is actually paid. Hence this is also a timing difference and will lead to the creation of tax asset to that extent.

4. TDS is required to be deducted on Payment of Consultancy Fees to Non Residents. If no TDS is deducted, then that particular expense will not be allowed as deduction. But this is temporary as the expense will be allowed when the TDS is deducted and remitted to the tax authorities.

5. Similarly Unpaid Bonus is not allowed as deduction Under Section 43B. It will be allowed only if the payment takes place before the due date of filing the returns or in the financial year in which the payment takes place.

6. As stated earlier only temporary differences give rise to deferred tax asset or Liability. Since Cash payment in excess of Rs. 20,000 is a permanent difference (there is no chance of reversal) it does not lead to the creation of DTA/DTL.

FINANCIAL YEAR 2008-09

EFFECT OF CHANGES IN TAX RATES:

On 12-02-2009, the Finance Minister announces that the Corporate tax rate is to be increased to 33.99% (tax=30%, Surcharge=10% on tax, EC @3% on tax +surcharge) w.e.f. A.Y 2009-10 i.e the F.Y 2008-09.

The introduction of surcharge is set to hit the corporate sector very hard which is already suffering from high tax rates.

How will this change affect the Deferred Tax which has been created when the tax rates were 30.9%. (30% tax, 3% EC on tax)

In the above case:

For the F.Y 2008-09

TABLE 6:

Opening Balance of Deferred Tax Liability as on 1-410,81,500 2008

Change on Account of Changes in Tax Rate : 11,89,650 10,81,500 X 33.99/30.9 Difference Deferred Tax Liability to be recognized - 1,08,150 on Account of Change in Tax Rates Closing Balance of Deferred Tax Liability as on 3111,89,650 03-2009

In addition to the above, if there are any DTA/DTL during the year, it should be accounted for at 33.99% (For Convenience Assume no Depreciation is charged this year)

FINANCIAL YEAR 2009-10

Now Mr. V decides to convert his company into a 100% Export Oriented Unit (EOU). For this purpose it is necessary to dispose of all the Assets of the Company and start fresh with newly purchased Machinery. He has to completely liquidate the company and start a new one. He has two main items of Machinery:

TABLE 7:

Manufacturing Machinery WDV as per IT Act on 1st April 2009 Value as per Books of Accounts Sold on Sale Value 3 Crores 5 Crores 16-02-2010 1.5 Crores

Scientific Research Machinery 0 1.6 Crore 12-05-2010 1 Crore

Since he intends to convert his company into an 100% EOU to claim deduction under section 10B, it is very necessary to close down his existing business, sell all the plant and machinery and buy new ones (One of the Conditions of Sec 10B is that it should not be constituted by the transfer of old plant and machinery and also by splitting or Reconstruction of the business.

As can be seen from the above, first Manufacturing Machinery is sold for Rs. 1.5 Crores, then later Research Machinery is sold for 1 Crore.

How does it affect DTA/DTL?

AS 22 says that Deferred Tax Asset should be recognized in relation to Loss under the head Capital gain to the extent that such losses can be set off in the subsequent periods from Income arising under the same heads. i.e Capital Gains

There should be reasonable certainty that such Loss can be set off. In this case lets assume that the Sale deed for Sale of Research Machine has been drafted for Rs. 1 Crore. The Capital Gains are Computed as follows

TABLE 8:

Manufacturing Research Machinery Machinery (in Crores) Sale Consideration 1.5 Less: WDV as per IT on the date of Sale 3 Short Term Capital Gains/ (Loss) (1.5) (In Crores) 1 0 1

This short term Loss of 1.5 Crores can be set off against gains of Rs. 1 Crore. Hence Deferred Tax Asset is to be recognized only to the extent of Rs. 1 Crore.

Since the Company is in a shut down mode, it has to settle its outstanding affairs.

Also note that for convenience Depreciation has not been charged during some years.

DEFERRED TAX AS ON 31-03-2010 is calculated as follows:

TABLE 9:

Expenses Disallowed under the IT Act Depreciation as per Books Loss on Sale of Manufacturing Machine (WDV 3,50,00,000 as per Books-Sale Proceeds) Less: Permanent Difference (Loss which cannot 50,00,000 3,00,00,000 be set off) Expenses Allowed under IT Act Interest on Term Loan Paid 80,00,000 Gratuity and Leave Encashment Paid out of 1,50,00,000 Provision Consultancy Fees : TDS has now been deducted 20,00,000 Unpaid Bonus of the F.Y 2007-08 Paid Now 75,00,000 3,25,00,000 Difference DTA to be created on Short Term Capital Loss TOTAL Deferred Tax Asset @ 33.99% -25,00,000 1,00,00,000 75,00,000 25,49,250

Balance DT is as follows:

TABLE 10:

Opening Balance as on 1-04-2009: DTL Less: DTA During the year Closing Balance of DTA as on 31-032010

11,89,650 25,49,250 -13,59,600

Now Lets assume the Business is wound up on 29-06-2010.

CLOSING DEFERRED TAX COMPUTATION

FINANCIAL YEAR 2010-11

TABLE 11:

Expenses Disallowed under the IT Act Loss on Sale of Scientific Research Machinery Less: Expenses allowable under the IT Act / Losses set off Short Term Capital Loss Set off Difference DTL @ 33.99%

60,00,000

100,00,000 -40,00,000 -13,59,600

Balance DTA/DTL is closed.

TABLE 12:

Opening DTA Balance as on 1-04-2010 Less: DTL Reversal during the year Closing Balance

13,59,600 13,59,600 NIL

HOW TO COMPUTE DTA/DTL WHEN 10A/10B, 80IA, 80IB EXEMPTION IS CLAIMED:

Now Mr V starts a new company which is a 100% EOU availing 10B exemption, He purchases a New Machinery for manufacture costing Rs. 15,00,00,000/- (15 Crores)

DEPRECIATION SCHEDULE FOR 15 YEARS I.T ACCOUNTS (SLM 15 years (30% YEAR WDV) (in 000s) (in 000s) 1 10,000 22,500 2 10,000 19,125 3 10,000 16,256 4 10,000 13,818 5 10,000 11,745 6 10,000 9,983 7 10,000 8,486 8 10,000 7,213 9 10,000 6,131 10 10,000 5,211 11 10,000 4,430 12 10,000 3,765 13 10,000 3,200 14 10,000 2,720 15 10,000 15,415* TOTAL 150,000 150,000

Note: Assumed to be fully depreciated in the last year.

The Following table illustrates the companys projected performance for a period of 15 years since its beginning.

Year Accounting

Depreciation Accounting Depreciation Taxable Section 10 Taxable as Per Income after as per IT Income after B

Income In 000s (Before Dep) 30,000.00 30,000.00 30,000.00 30,000.00 30,000.00 30,000.00 30,000.00 30,000.00 30,000.00 30,000.00 30,000.00 30,000.00 30,000.00 30,000.00 30,000.00

Books

Depreciation Income In 000s (Before Dep) 20,000.00 30,000.00 20,000.00 30,000.00 20,000.00 30,000.00 20,000.00 30,000.00 20,000.00 30,000.00 20,000.00 30,000.00 20,000.00 30,000.00 20,000.00 30,000.00 20,000.00 30,000.00 20,000.00 30,000.00 20,000.00 30,000.00 20,000.00 30,000.00 20,000.00 30,000.00 20,000.00 30,000.00 20,000.00 30,000.00

Act

Depreciation Exemption

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

10,000.00 10,000.00 10,000.00 10,000.00 10,000.00 10,000.00 10,000.00 10,000.00 10,000.00 10,000.00 10,000.00 10,000.00 10,000.00 10,000.00 10,000.00

22,500.00 19,125.00 16,256.25 13,817.81 11,745.14 9,983.37 8,485.86 7,212.98 6,131.04 5,211.38 4,429.67 3,765.22 3,200.44 2,720.37 15,415.45

7,500.00 10,875.00 13,743.75 16,182.19 18,254.86 20,016.63 21,514.14 22,787.02 23,868.96 24,788.62 25,570.33 26,234.78 26,799.56 27,279.63 14,584.55

7,500.00 10,875.00 13,743.75 16,182.19 18,254.86 20,016.63 21,514.14 22,787.02 23,868.96 24,788.62 0 0 0 0 0

Year 1 2 3 4 5 6 7 8 9 10 11 12 13 14

Depreciation as per Books 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000

Depreciation as Difference per IT Act 22,500 -12,500.00 19,125 -9,125.00 16,256 -6,256.25 13,818 -3,817.81 11,745 -1,745.14 9,983 16.63 8,486 1,514.14 7,213 2,787.02 6,131 3,868.96 5,211 4,788.62 4,430 5,570.33 3,765 6,234.78 3,200 6,799.56 2,720 7,279.63

Deferred Tax @ 33.9% -4,248.75 -3,101.59 -2,126.50 -1,297.67 -593.17 5.65 514.65 947.31 1,315.06 1,627.65 1,893.35 2,119.20 2,311.17 2,474.35

15

10,000

15,415*

-5,415.45

-1,840.71

In Accordance with Accounting Standard 22 the timing difference which reverses itself during the tax holiday period should not be recognized. In the first five years, DTL of Rs. 11,367.68 (000s) arises. This is reversed in the subsequent 5 years (i.e year 6 to 10) to the extent of Rs. 4,410.33 (000s). Thus in year 1 no deferred tax liability need to be recognized. (4248.754410.33= -161.58 OR NIL). In year 2 DTL of only 2,940.01 needs to be recognized i.e (3101.59161.58). The DTL to be recognized in year 1 to year 5 are given below.

Total DTL Reversal YEAR DTL AS TABLE PER (DTA during period) (DTL)/DTA to be the recognized

TAX HOLIDAY PERIOD 1 2 3 4 5 6 7 8 9 10 AFTER TAX HOLIDAY 11 12 13 14 15

-4,248.75 -3,101.59 -2,126.50 -1,297.67 -593.17 5.65 514.65 947.31 1,315.06 1,627.65 1,893.35 2,119.20 2,311.17 2,474.35 -1,840.71

0.00 -2,940.01 -2,126.50 -1,297.67 -11367.68 -593.17 0 0 0 0 +4410.33 0 1,893.35 2,119.20 2,311.17 2,474.35 -1,840.71

HOW TO COMPUTE DTA/DTL IF MAT PROVISIONS ARE APPLICABLE:

The DTA/DTL is to be computed on normal rate of tax and not at the rates prescribed under MAT.

MAT Credit can be considered as an asset only if the company expects to pay tax at the normal rates in the future years.

Thank you for Reading. I will consider my efforts amply rewarded if you find this useful.

I am an Articled Assistant from Mangalore who lives by the motto "If you make mistakes, make new ones each day so as that you learn something new everyday"

Source : AS -22 as issued by ICAI -