A Deferred Tax Liability is an entry on a company’s balance sheet, in accordance with Indian Accounting Standard (Ind AS) 12, signifying taxes that are payable in the future due to timing differences between their accrual and actual payment.
The deferral arises from the contrasting timing of tax recognition and payment. Notably, a common instance of a Deferred Tax Liability arises from the divergence in depreciation treatment between tax regulations and accounting standards.
For financial reporting, long-lived asset depreciation typically employs the straight-line method, while tax norms permit the use of an accelerated depreciation approach. This variance results in lower depreciation under straight-line, temporarily causing higher accounting income than taxable income.
As stipulated by Ind AS 12, the company acknowledges the deferred tax liability emerging from the gap between pre-tax accounting earnings and taxable income. Over time, as asset depreciation continues, the disparity between straight-line and accelerated methods lessens. Consequently, the deferred tax liability diminishes gradually through a succession of offsetting accounting entries.
