Deferred Tax

Deferred tax in financial statements denotes future tax liabilities or tax assets stemming from temporary differences—when an asset or liability is recorded on the balance sheet but its tax impact occurs later. This arises due to differences between financial statements prepared in accordance with the rules of the Companies Act and taxable profit based on provision of the Income Tax Act. Typical example is depreciation of fixed assets. These items generate deferred tax assets or liabilities, reflecting taxes to be paid or recovered in the future.1. When company’s book profit is higher than the taxable profit it will pay less tax now and pay more tax in future creating Deferred Tax Liability.2. When company’s book profit is less than the taxable profit it will pay more tax now and pay less tax in future creating Deferred Tax Asset.