Deferred Tax Liability
What is Deferred Tax Liability (DTL)?
A Deferred Tax Liability (DTL) is a tax payment that a company owes but will pay in the future, not in the current accounting period. It arises due to temporary differences between a company’s accounting income (financial statements) and taxable income (tax returns).
In simpler terms, it’s money a company will owe the tax authorities later, due to how some revenues or expenses are treated differently for accounting and tax purposes.
Why Does It Happen?
Companies use different accounting methods for bookkeeping and tax filing. For example:
- Depreciation methods for accounting may differ from those allowed by tax laws.
- Revenue recognition rules may vary.
- Expenses may be recorded earlier or later for tax purposes.
These differences create a timing gap, leading to either a deferred tax asset or deferred tax liability.
Example
Suppose a company:
Buys machinery worth ₹10 lakh.
Uses straight-line depreciation for accounting: ₹2 lakh/year for 5 years.
Uses accelerated depreciation for tax: ₹4 lakh in Year 1, decreasing later.
In Year 1:
| Particulars | Accounting Books | Tax Return |
|---|---|---|
| Depreciation | ₹2 lakh | ₹4 lakh |
| Profit before tax | ₹8 lakh | ₹6 lakh |
| Tax rate | 30% | 30% |
| Tax paid | ₹1.8 lakh | ₹1.2 lakh |
Difference in tax = ₹0.6 lakh → Deferred Tax Liability
This ₹0.6 lakh will be paid in the future when the tax depreciation reduces.
How is it Shown in Financial Statements?
- Balance Sheet: Listed under non-current liabilities.
- Income Statement: Tax expense includes both current and deferred tax.
Importance of Deferred Tax Liability
- Accurate Financial Reporting: Ensures true representation of future obligations.
- Investor Insight: Shows the timing impact of tax strategies.
- Tax Planning: Helps in understanding how current decisions affect future taxes.
Deferred Tax Liability vs Deferred Tax Asset
| Feature | Deferred Tax Liability (DTL) | Deferred Tax Asset (DTA) |
|---|---|---|
| What it means | Taxes to be paid in the future | Taxes saved or refunded in the future |
| Occurs when | Tax expense < accounting expense now | Taxable income > accounting income now |
| Example | Accelerated depreciation | Carry-forward losses or provisions |