Explain deferred tax and give an example of how a deferred tax liability and a deferred tax asset arise.

What the interviewer wants to hear

• Deferred tax arises from temporary differences between carrying amount and tax base
• Taxable differences create a deferred tax liability
• Deductible differences create a deferred tax asset
• Deferred tax assets need probable future taxable profit
• Uses tax rates enacted or substantively enacted

Model answer

Deferred tax exists because accounting profit and taxable profit recognise some items in different periods. Under Ind AS 12 or IAS 12, we compare each asset’s and liability’s carrying amount with its tax base. Where future tax will be higher, we have a taxable temporary difference and a deferred tax liability. A common example is plant where tax depreciation is faster than book depreciation: if the book value is ₹8 lakh and the tax written down value is ₹6 lakh, at 25% we recognise a liability of ₹50,000. A deferred tax asset arises from deductible differences, for example a provision for leave encashment that is only deductible for tax when paid, or carried-forward tax losses. We recognise a deferred tax asset only to the extent future taxable profit is probable. We use rates enacted or substantively enacted at the reporting date, and the deferred tax movement goes to profit and loss or OCI depending on the underlying item.

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