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Def tax
Def tax
Def tax
Def tax
Def tax
Def tax
Def tax
Def tax
Def tax
Def tax
Def tax
Def tax
Def tax
Def tax
Def tax
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Def tax

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  • 1. UnderstandingDeferred TaxesBy Darayus Bajan
  • 2. The term “Deferred” as per the dictionary meansa) to postpone or to delayORb) Withhold until a future dateWhat is the meaning of the term“Deferred”?2
  • 3. Deferred Tax in very simple terms is the difference in TAXbetween Accounting/Book profits and Taxable profits.For e.g. If the Tax Rate is say 30%.On Book Profits of Rs. 1,000, tax at 30% shall be Rs. 300On Taxable Profits of Rs. 1,200, tax at 30% shall be Rs. 360In the above e.g. Deferred Tax (DT) is Rs. 60Now let us analyze this difference in profits as per books (asper Cos Act and AS) and profits as per tax laws (taxableprofits)What is Deferred Tax?3
  • 4. Main Reason – differences between provisions of AS/Cos Actand those under Tax Laws (Income Tax Act).Examples of differences:1) Depreciation computation between Cos Act and IncomeTax Acta) different rates,b) 180 days Vs. actual no. of days,c) Diff methods - SLM vs. WDV etc.2) Certain expenditure allowed on only payment basis underIncome Tax Act – for e.g. Payment of Bonus/Gratuity etc.Why & what are the differences inbook and tax profits ?4
  • 5. The differences between the book profits and taxable profitscan be broadly split into two types:A. Temporary differencesWhere an item of expenditure is disallowed in oneyear but allowed in another year say depreciation,payment of gratuity etc.B. Permanent DifferencesWhen an item of expenditure is NEVER allowed as a taxdeductible item. Say contribution to a political party,donations not exempt u/s 80 etc.What are the types/nature ofdifferences in taxable profits?5
  • 6. When the book and tax profits are different, the effective taxrate is significantly different than the enacted tax rate.In our earlier example, the book profits are Rs. 1,000 but theactual tax required to be paid to the government is Rs. 360,so the tax rate becomes 36% instead of 30%.Similarly in Year 2, the book profits shall be Rs. 1,000, but thetax shall be computed as Rs. 800 * 30% = Rs. 240, theeffective tax rate becomes 24%Also summarized in table on the next slideWhat happens when there aredifferences in book and tax profits ?6
  • 7. What happens when there aredifferences in book and tax profits ?7
  • 8. Whenever there are differences betweenbook profits and taxable profits on accountof differences between the two laws theactual tax charge distorts the profits after taxas the effective tax rate is very different fromthe enacted tax rate. This creates volatility inperformance of the company.What is the Conclusion?8
  • 9. To eliminate volatility in the performance ofthe company PL we need to account for taxesusing Deferred Tax.Let us now evaluate how accounting for taxon Def tax basis removes the volatility in ourearlier example.How do we do to eliminate thevolatility in profits after tax?9
  • 10. Use of Deferred Tax10
  • 11. How do we do pass the AccountingEntries for Deferred Tax?11
  • 12. Def Tax Asset – when tax paid in a year is HIGHER than whatis required to be paid as per the books, an asset is createdwhich can be used to reduce tax impact in future. For e.g.expenses allowed only on payment basis – bonus, gratuityetc.Def Tax Liability – when tax paid is LOWER than what isrequired as per the books, a liability is created which shallneed to be paid in future. For e.g. higher rates ofdepreciation allowed under tax laws.What is a Deferred Tax Asset and aDeferred tax liability?12
  • 13. Def Tax on o/a of Depreciation13
  • 14. Deferred tax can eliminate volatility only inrespect of temporary differences. In case ofpermanent differences, the effective tax rateis actually higher than the enacted tax rate.Can Accounting for Deferred Tax takecare of all differences?14
  • 15. QUESTIONS?

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