Deferred Tax Asset/Liability
Accounting principles and tax practices rarely align when it comes to the allowance or deduction of expenses in income computation. These differences can be broadly classified into two categories: (a) Permanent differences and (b) Temporary differences. A permanently disallowed item that cannot be reversed is classified under Permanent differences. For instance, cash payments exceeding the threshold will be disallowed once and for all, and no subsequent action can rectify this. Once tax is paid on such disallowances, it cannot be recovered in the future.
In contrast, expenses paid without deducting tax at source may initially be disallowed but can be corrected when the defaulted tax is deducted in future payments, thus reversing the error. Such disallowances may be allowed later, and this delayed allowance due to corrective action is known as a timing difference. Payments made or to be made due to these timing differences can give rise to deferred tax assets or liabilities.
By CA L.Muralidharan and CPA L.Mukundan
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