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Deferred Tax Asset (DTA)

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Divya Singhvi

Deferred Tax
deferred tax asset
Income from Business & Profession
Income Tax

An organization prepares two different financial reports every financial year – an income statement and a tax statement. The motive behind the preparation of two different reports was a difference in guidelines. Hence, this disparity creates the scope for the Deferred Tax. Deferred Tax Liability (DTL) or Deferred Tax Asset (DTA) is an important part of Financial Statements.

What is Deferred Tax Asset (DTA)?

A part of deferred tax is a deferred tax asset, which is commonly known as DTA. Deferred-tax assets are created when a company’s recorded income tax that is reported in its income statement is lower than that paid to the tax authority. It originates when the payment of the tax amount is complete or has been carried forward but it has still not been acknowledged in the statement of income. The actual value of the deferred tax asset is generated by comparing the book income with the taxable income.

How DTA is created?

At this point, readers might wonder how a company’s recorded income tax could be less than it pays to the authority. Let’s take an example where a company has made a profit of INR 10,000 before taxes, and it includes INR 4000 as bad debts that it has suffered. Now, to make a profit on tax payment, the company will account for this bad debt for the future when it recovers the sum. Therefore, taxable income after this will be INR 14,000 and if the income tax rate is 30%, for example; then the company has to pay a tax of INR 4200 (14,000*30%).

On the other hand, if these bad debts weren’t permissible, the company would have to pay a tax of INR 3000 (10,000*30%). Thus, for just INR 1200 more, the company has created a deferred tax.

Listed below are a few scenarios which result in DTA arising for a company:

The difference in the depreciation method

A deferred tax asset is created when there is a difference between the approach in which a company calculates depreciation on its assets and the method of depreciation calculation as prescribed by the IT Department.

For example, a company owns a computer worth INR 50,000 and has a lifespan of 5 years. 30% tax is charged on this machinery. Thus the company will pay,
For its own books: 50,000/5= 10,000 then 10,000*30%= INR 3000. In their tax document: 50,000*40%= 20000 then 20000*30%= INR 6000
Thus, the company is paying more taxes for its assets and creating a DTA.

Rate of Depreciation

At times, companies use a lower depreciation rate for their books compared to the one that applies for filing their taxes. For example, a company uses 10% depreciation rate for their books and 15% rate for their tax purposes. This variance in the final amount generates a deferred tax asset for companies.

Expenses 

As per Income Tax Act, few expenses are not allowable while calculating income from a business. Thus this creates DTAs in the company accounts. For example:

Particulars As per company books (INR) As per taxes (INR)
Income 12,000 12,000
Expense 6,000 6,000
Any particular expense 2,000 0
Taxable income 4,000 6,000
Tax (30%) 1,200 1,800

This difference in tax payment creates a DTA of INR 600 in the balance sheet.

Bad debts

Bad debts are other instruments that create deferred tax assets. Companies do not consider bad debts until it is written off; this difference in the taxable income of their book and their tax documents creates a DTA.

Carry forward of losses

A deferred tax asset can also occur due to losses that are carried over to a new accounting period from a previous accounting period and can then be claimed in the new period as an asset. This reduces a company’s tax liability.  Hence, a loss like this can be an asset owing to its benefits.

Calculation of DTA

DTA can be calculated manually through the following steps:

Benefits of Deferred Tax Assets

The benefit of a deferred tax asset is that it lowers a company’s future liability. It is like a pre-paid tax that helps companies to reduce their future liabilities. DTA brings value to every company. It represents the payment of taxes of a company but is not recognizable in its financial statements.

FAQ

Where does deferred tax asset go on balance sheet?

DTA is mentioned under non-current assets in the company’s balance sheet.

Is it mandatory to create DTA?

No, DTA creation is not mandatory. Furthermore, companies use this method to avail its benefits in the future.

How does a deferred tax asset work?

A deferred tax on the company’s balance sheet is generally seen as a good sign, as it will work towards the company’s future tax benefit. Thus, it works like a pre-paid tax, which can help the company in reducing the tax amount in the future.

Got Questions? Ask Away!

  1. The Due Date to pay Advance Tax for FY 2020-21 (AY 2021-22) is 15th March 2021. If your total tax liability during the financial year exceeds INR 10,000, you must pay Advance Tax as a proportion of tax liability in each quarter of the financial year. You can read more here

    If you do not have profits in F&O Trading and no other taxable income for FY 2020-21, you are not required to pay Advance Tax. Since you have received the ITBA email, you can log in to your account on the income tax e-filing website, check the tab for e-proceedings and submit a response. Under the response, you can describe your income situation and justify why advance tax is not applicable.

    You can also use the Advance Tax Calculator to calculate your Advance Tax liability for the FY

    Feel free to get in touch with us here, we’ll be happy to help you with Advance Tax :slight_smile:

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