Ind AS 12 deferred tax — temporary differences, DTA/DTL, worked example.

What is Ind AS 12?

Ind AS 12, Income Taxes, prescribes how an entity accounts for the current and future tax consequences of transactions and events already recognised in its financial statements. Its core job is deferred tax — the entry that reconciles the tax an entity actually pays this year (as computed under the Income-tax Act) with the tax expense that belongs against this year's accounting profit.

Ind AS 12 uses a balance-sheet approach: for every asset and liability on the balance sheet, you compare its carrying amount (the book value under Ind AS) to its tax base (the amount attributed to it for tax purposes). Any difference between the two is a temporary difference, and — subject to specific exceptions in the standard — it gives rise to a deferred tax asset or deferred tax liability. This replaces the timing-difference, income-statement-based approach of the older AS 22.

Temporary differences — the framework

A temporary difference is simply carrying amount minus tax base, applied asset by asset and liability by liability. Which way it points determines whether you recognise a liability or an asset.

Two recognition rules matter most in practice. A DTL is recognised for essentially all taxable temporary differences, with a small number of specific exceptions in the standard (for example, on initial recognition of goodwill). A DTA is recognised only to the extent it is probable that future taxable profit will be available against which the deductible temporary difference, unused tax loss, or unused tax credit can be utilised — this is a judgement call, not an automatic entry, and it is reassessed at every reporting date.

Deferred tax is measured at the tax rates expected to apply when the asset is realised or the liability is settled, using rates (and tax laws) that are enacted or substantively enacted by the balance sheet date — and it is never discounted to present value, however far out the reversal is expected.

Worked example — deferred tax on a depreciation timing difference

Facts: On 1 April, Precision Tools Pvt Ltd buys a machine for ₹10,00,000. For books (Ind AS), it depreciates the machine straight-line over 5 years — ₹2,00,000 depreciation in Year 1. For tax, the Income-tax Act allows depreciation on the written-down value (WDV) method; assume the applicable tax depreciation for Year 1 works out to ₹4,00,000. The applicable income-tax rate is 25%. There are no other differences between book and tax profit.

Note on rates: the exact WDV depreciation rate for a given asset block, and the applicable corporate tax rate for the entity, both depend on the asset classification and the tax regime the company has opted into — verify the current rates on the Income Tax portal before applying this pattern to a real client. The mechanics below hold regardless of the exact percentages.

Step 1 — carrying amount vs tax base at the end of Year 1:

Carrying amount (₹8,00,000) exceeds tax base (₹6,00,000) by ₹2,00,000. Because tax depreciation ran ahead of book depreciation, the asset's tax base is now lower than its book value — this is a taxable temporary difference, since it will increase taxable profit relative to accounting profit in future years as the gap unwinds. That means a deferred tax liability.

DTL = ₹2,00,000 × 25% = ₹50,000.

Step 2 — the deferred tax journal entry (Year 1, at year end):

This entry does exactly what deferred tax is meant to do: current tax for the year (computed on taxable profit, which is lower because tax depreciation of ₹4,00,000 was claimed) understates the tax expense that really belongs against this year's higher accounting profit. The ₹50,000 deferred tax charge tops up total tax expense in the P&L to the amount consistent with accounting profit, and books a liability for the extra tax that will fall due in later years — precisely when tax depreciation slows down and book depreciation (still a flat ₹2,00,000 a year under SLM) overtakes it, reversing the difference and the DTL along with it.

Practical application notes for a practicing CA

• Work asset-by-asset (or liability-by-liability), not at the aggregate level. Netting a portfolio of assets before computing temporary differences can mask individual taxable and deductible differences that need separate treatment, particularly around classification and set-off eligibility.
• DTA recognition needs documented evidence, not optimism. "Probable future taxable profit" is a real test — build a forecast, tie it to the entity's actual budget/business plan, and revisit it every reporting date. A DTA recognised on thin evidence is one of the most common audit adjustments on Ind AS financials.
• Watch tax-rate changes mid-year. If a Finance Act changes the applicable rate before the balance sheet date, remeasure existing DTA/DTL balances at the new rate — the effect goes through the P&L (or OCI, if the underlying item was originally recognised there) in the period the change is substantively enacted, not when it takes effect.
• Items recognised outside profit or loss get their deferred tax recognised the same way. Deferred tax on items taken to OCI (such as a revaluation surplus) or directly to equity must also go to OCI or equity — not automatically to the P&L. Trace each temporary difference back to where the underlying item was recognised.
• Don't confuse deferred tax with MAT credit or advance tax. They sit in different parts of the balance sheet and follow different recognition logic; keep the current-tax workpaper (advance tax, TDS, MAT credit) separate from the deferred-tax workpaper (temporary differences, DTA/DTL) even though both feed the total tax expense line.

Depreciation rates, tax rates and specific carve-outs referenced above change with each Finance Act — verify the current figures on the Income Tax portal or the applicable Finance Act before finalising a client's computation.

Where TatvaBooks helps

TatvaBooks maintains a clean fixed-asset register with book depreciation computed automatically, so the starting carrying amounts for your deferred tax workings are always current and don't need to be pulled together separately at year end. It won't replace your tax-depreciation computation or your professional judgement on DTA recognition — but it keeps the books side of the comparison audit-ready.

See the for Chartered Accountants page, or go straight to pricing.

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