Question

Do changes in the balance of the deferred income tax account affect the amount paid by the company for income taxes? How is the payment affected?

Answer 1

The tax payment amount of the company is governed by the respective nation's tax laws. Say for India, it is governed as per The Income Tax Act , 1961 and the rules made thereunder. The amount of tax liability is determined as per the provisions of tax laws of the country. The amount or balance of deferred income tax account is determined as per the nation's adopted accounting standards (Financial reporting framework) or the IFRS (International Financial Reporting Standards) and International Accounting Standards (IAS). IAS 12 'Income Taxes' are followed for Deferred Tax balances. The balance of deferred income tax account for any transaction is determined based on the difference between accounting base (carrying amount in books of account) and tax base (carrying amount as per tax laws) of the transaction and the applicable tax rate in force for the reporting period.

Hence, this tax payment amount has no effect in the balance of deferred income tax account of any company, nor does the changes in the balance of the deferred income tax account affect the amount paid by the company for income taxes. The deferred income tax account balance and tax payment amount have no inter-dependence to one another, whatsoever.

Tax payment is affected based on the provisions of applicable tax laws which further depends on factors like income of the company, deductions it has claimed, tax credit availed, etc.