Tax differences arising because taxable income (per Income Tax Act) differs from accounting profit (per accounting standards) in timing.
Deferred Tax arises from temporary differences between the book value of assets/liabilities (accounting) and their tax base (income tax computation). Under Ind AS 12, these timing differences create either Deferred Tax Assets (future tax savings) or Deferred Tax Liabilities (future tax payments). Most common cause: depreciation — Companies Act rates differ from Income Tax Act rates. In early years, tax depreciation (WDV, higher rate) > book depreciation (SLM, lower rate), creating DTL. This reverses in later years. Deferred tax ensures the P&L reflects the correct tax expense matching the accounting profit.
Machine cost ₹10,00,000. Book depreciation (SLM 10%): ₹1,00,000. Tax depreciation (WDV 15%): ₹1,50,000. Year 1 difference: ₹50,000. DTL = ₹50,000 × 25% tax rate = ₹12,500. Meaning: you paid less tax NOW (because tax depreciation was higher) but will pay MORE tax LATER (when book depreciation exceeds tax depreciation). DTL is this future tax obligation.
Ensures accurate financial reporting and record-keeping
Helps maintain regulatory and tax compliance
Enables better-informed business decisions
Improves operational efficiency and cash flow management
DTA (Asset): You paid MORE tax now than accounting profit suggests — future benefit (tax saving coming). Examples: provisions not yet allowed as deduction, carried-forward losses. DTL (Liability): You paid LESS tax now than accounting profit suggests — future obligation (more tax to pay). Example: accelerated tax depreciation. DTA reduces future tax; DTL increases future tax.
Under Ind AS (mandatory for listed and large companies): Yes, mandatory. Under old Indian GAAP (AS 22 — applicable to smaller companies): Yes, if timing differences are material. Practically, very small private companies (turnover < ₹50 crore, not applying Ind AS) should still compute deferred tax if the impact is material to give a true and fair view. It's a common audit qualification point.
A tax paid directly by an individual or organization to the government, where the burden cannot be shifted to another person. Examples include income tax, corporate tax, and capital gains tax.
The systematic allocation of the cost of a tangible asset over its useful life, representing the decline in value due to wear, use, or obsolescence.
The legal framework of laws, regulations, and filings that a business must adhere to, including tax filings, labor laws, corporate regulations, and industry-specific requirements.
Formal records of a business's financial activities, comprising the Balance Sheet, Profit & Loss Statement, Cash Flow Statement, and Notes to Accounts.
A legally mandated examination of a company's financial statements by an independent auditor to verify they present a true and fair view.
Let Laabam.One handle the complexity. From invoicing to GST filing, our ERP software makes accounting effortless.