Deferred Tax refers to the difference between the income tax payable as per the Income Tax Act and the income tax calculated based on accounting profits under the Companies Act. This difference arises because some income or expenses are recorded at different times for tax and accounting purposes.
In the Indian context, deferred tax is classified into two types — Deferred Tax Asset (DTA) and Deferred Tax Liability (DTL). A Deferred Tax Asset occurs when a company has overpaid tax or paid tax in advance, which can be adjusted against future tax payments. On the other hand, a Deferred Tax Liability represents taxes that are due in the future because of temporary differences in income recognition.
Deferred tax is commonly seen in cases involving depreciation, provision for doubtful debts, and expenses disallowed under tax laws but recorded in books. It plays a critical role in financial statements and tax planning, especially for companies and LLPs preparing audited accounts.
For small businesses and startups, understanding deferred tax is important when preparing financials for investors, tax filings, or during audits. It ensures transparency and compliance with Indian accounting standards, such as Ind AS 12 or AS 22.
Businesses can refer to FinTax24’s Income Tax Solutions to stay updated on tax compliance requirements, including how deferred tax may impact their filings or planning.
In summary, deferred tax helps align a business’s financial reporting with tax regulations and ensures smoother tax audits and future liability management.