Deferred meaning postpone something, deferred tax asset means postpone taxes to future. Why it happens? Company estimates it has over paid taxes than it’s due. In time to come it should come back as in terms of tax relief (deductibles). Liability will be reverse meaning underpaid and expect more taxes in provision.
One of major reason for deferred tax is difference between Income Tax Act and Companies Act. Though books of account is prepared as per companies act , tax payment is calculated as per Income Tax Act. The difference is due to mainly:
- Difference of accounting treatment between two regulations say a prominent one is depreciation rates are different in Income tax act and companies act. Most of Income tax depreciation rates are higher than companies act. It creates additional deductibles (tax benefit) and hence a deferred tax asset is created. Depreciation is first item u see there.
- Similarly 35DD of Income tax act allows business restructuring expenses (demerger, amalgamation etc) to be amortised over five year period. As per companies act (which follows accounting standard) management has discretion upto 10 years. In case of differential treatment tax payable calculation will be changed. Right?
- The item expenses where TDS is not deducted is self explanatory. This means I have charged full expenses as eligible in accounts without withholding (tax). Company is adjusting those proportion expenses for tax calculation.
- Profit/ loss by Income tax computation lot of time varies with management computation. Like dis allowance of expenses, fringe benefit taxes etc.
- Lease equalisation charges: accountant says there are two type of leases i.e. operating lease and finance lease. Taxmen says there is nothing called finance lease. What happens is depreciation charges are debited instead of lease rent to books (for lessee). This creates a timing difference and deferred tax asset. But lease accounting itself is a complex animal.
Does this help you? Let me know if you need more clarification.
A link from our taxmen website will clarify further.
https://www.incometaxindia.gov.in/Pages/tools/deferred-tax-calculator.aspx