Question

‘Income tax shall be paid on taxable income times tax rate. It makes sense to pay
income tax for current year, but we should not be asked to account for deferred tax
assets and liabilities’. Do you agree with this statement? Discuss your arguments.

Answer 1

The first statement related to "Income tax shall be paid on taxable income time's tax rate" is a correct one, however the statement is too generic and does not consider other factors which goes in computing the income tax. There are rules and computation mechanism to calculate income tax under the tax rules which can be different from the accounting rules and hence these differences lead to deferred tax assets and liabilities.

One of the simplest example is of a carryforward loss which is available for offset for future periods in tax rules and hence this loss in that sense is an asset. There are other examples like difference in depreciation methods as per tax rules and accounting rules which can create a temporary differences leading to deferred tax.

In summary, whenever there are differences in statutory books and tax books which creates a permanent or temporary differences it leads to creation of deferred taxes.