Deferred Tax

Deferred Tax – This arises because of timing differences between the way income or expenses are recognized in accounting books (financial statements) and the way they are recognized for tax purposes. Essentially, it represents taxes that are payable or recoverable in the future due to these differences.

Example: In accounting books, a company might depreciate an asset using straight-line method, while the Income Tax Act allows accelerated depreciation. This creates a difference in the reported profit for accounting vs. taxable profit. The company may pay less tax now but will eventually pay more (or recover tax) in the future. The resulting tax effect is recorded as a Deferred Tax Liability (DTL) or Deferred Tax Asset (DTA) in the balance sheet. Key Point: Deferred tax is not current tax, but a timing adjustment to align accounting profit with taxable profit over time.