Question

"Deferred Taxes" Please respond to the following:

  Are deferred taxes an unfair loophole that must be closed? Provide a rationale for your response.   

Answer 1

Deferred taxes is not a loophole. It is an accounting concept because Provision for taxation as per books of accounts and Taxation as per Tax laws will differ.

The deferred tax represents a future tax payment a company is expected to make to tax authorities in future. It is calculated as the company's anticipated tax rate times the difference between its taxable income and accounting earnings before taxes.

While calculating taxable income, certain expenses debited to Profit or Loss A/c are disallowed in one period. In the same manner, certain incomes credited in one period to Profit or Loss A/c form part of the income in future period. Taxation on such items are considered as temporary differences.  

For example:

(i) In case of treatment of deferred revenue expenditure (say, advertisement expenses incurred in one year but the benefit of which extends in subsequent years also), the expenditure incurred is amortised over a period of time but as per tax laws, it is allowed wholly in first year in which such deferred revenue expenditure is made.

(ii) In case of advance incomes received (say, advance rent), the disclosure of same is mandatory for the purpose of calculating taxable income. However, this income is recognized in the books of account when actually earned.