Deferred Tax Assets and Liabilities Examples

Deferred Tax is the difference of tax which is calculated by assesses and by income tax department. If there is difference in two calculation, deferred tax will come to existence. When Deferred Tax will be receivable from Income tax department, it will become outstanding income and it will be shown as asset of company. When Deferred Tax will be payable to income tax department, it will be outstanding expense and it will be shown as liability in balance sheet.

Deferred Tax Liability Examples 

1st Example 

We have bought an machinery with Rs. 2000 Crores on April. 2009. We do not know the present rates of income tax. For example, we charge income tax with 20% but income tax rate is 10%. Now, depreciation as per our calculation is Rs. 400 Crores and as per income tax department is Rs. 200 Crores on 31st March 2010. It means, we have tried to save income tax illegally with Rs. 200 Crores. Now  Rs. 61.8 Crores (30% tax + 3% educational cess) deferred tax  will be payable. We show it as current liability in the balance sheet.

2nd Example 

We have bought an machinery with Rs. 2000 Crores on April. 2009. We do not know the present rates of income tax. For example, we charge income tax with 20%  fixed installment method but income tax rate is 80% diminishing method.

Now in the end of second year 31st March 2011

Depreciation as per our calculation = Rs. 400 Crores

Depreciation as per income tax department = Rs. 320 Crores

Now, you are seeing, Depreciation is just Rs. 320 Crores but we have shown as Rs. 400 Crores due to this, our net profit is less Rs. 80 Crores. Now, we have to pay tax on this Rs. 80 Crores. So, this is also deferred tax but it is liability.


Deferred Tax Asset Examples 


1st Example 

We have bought an machinery with Rs. 2000 Crores on April. 2009. We do not know the present rates of income tax. For example, we charge income tax with 10% but income tax rate is 20%. Now, depreciation as per our calculation is Rs. 200 Crores and as per income tax department is Rs. 400 Crores on 31st March 2010. It means, we have paid more tax due to less calculation of depreciation Rs. 200 Crores. Now  Rs. 61.8 Crores (30% tax + 3% educational cess) deferred tax  will be receivable as deferred tax. We show it as current current asset  in the balance sheet.


2nd Example 

We have bought an machinery with Rs. 2000 Crores on April. 2009. We do not know the present rates of income tax. For example, we charge income tax with 20%  fixed installment method but income tax rate is 20% diminishing method.

Now in the end of first year 31st March 2011

Depreciation as per our calculation = Rs. 400 Crores

Depreciation as per income tax department = Rs. 1600 Crores

Now, you are seeing, Depreciation should Rs. 1600 Crores but we have shown as Rs. 400 Crores due to this, our net profit is shown as excess of  Rs. 1200 Crores. Now, we have to get refund of tax on this Rs. 1200 Crores. So, this is also deferred tax but it is asset.

Related : Valuation of Account of Deferred Tax Asset