Who is required to compute deferred tax?
Every company, required to prepare books of accounts in accordance with Accounting Standards, shall compute the deferred tax if some timing difference arises during the year.
What is timing difference?
Timing differences are the 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.
a) Taxable Income: Taxable income (tax loss) is the amount of the income (loss) for a period, determined in accordance with the tax laws, based upon which income-tax payable (recoverable) is determined.
b) Accounting Income: Accounting income (loss) is the net profit or loss for a period, as reported in the statement of profit and loss, before deducting income-tax expense or adding income-tax saving.
In simple language, the items which may constitute timing difference shall be of following nature:
1) Expenditures which are not allowed as deduction from taxable income, however, it will be allowed as deduction from taxable income of subsequent years;
2) Expenditures which are allowed to be deducted from the taxable income even if they are not yet accrued in the books. However, no deduction will be allowed in subsequent years when these expenditure actually accrues;
3) Advance income which is brought to tax during the financial year even if it is not yet accrued in the books of accounts;
4) Accrued income not brought to tax in the current financial year but will be charged to tax in subsequent years.
What is permanent difference?
Permanent differences are the differences between taxable income and accounting income for a period that originate in one period and do not reverse subsequently.
How to compute the deferred tax?
Deferred tax is the tax effect of timing differences. Deferred tax should be recognised for all the timing differences, subject to the consideration of prudence in respect of deferred tax assets.
Deferred tax assets should be recognised and carried forward only to the extent that there is a reasonable certainty that sufficient future taxable income will be available against which such deferred tax assets can be realised.
Where an enterprise has unabsorbed depreciation or carry forward of losses under tax laws, deferred tax assets should be recognised only to the extent that there is virtual certainty supported by convincing evidence that sufficient future taxable income will be available against which such deferred tax assets can be realised.
How to use the calculator?
The Excel Calculator has been developed using Macros in Visual Basic. So the utility can be used only if you have enabled the Macros.
The first sheet is ‘Tax Calculator’, which is meant to compute the average tax rate at which deferred tax shall be determined. Either enter the figure of average tax rate or compute using the tax calculator given in the sheet.
The second sheet is ‘Input Sheet’, which will compute the timing difference. Substantially all timings differences have been provided in user forms. You just need to enter the closing and opening figure of those items which probably can give rises to the timing difference, and the utility will automatically compute the deferred tax.