What is Deferred Tax Liabilities (DTL)?

Deferred Tax Liability (DTL) can be defined as Provision for Future Taxation or an obligation to pay taxes in the future.The DTL reported on an organization’s balance sheet represents the net difference between the taxes that are paid in the current accounting period and the tax that is assessed or is due for the current period that will be paid in the next accounting period. The tax effect on the timing differences is thus termed as deferred tax which literally means taxes which are deferred.

As per the provisions of Income Tax Act 1961, certain types of expenditures are allowed for deduction wholly in the year such expenditures are incurred, but in the financial books such expenditure is allowed over a period of time. The provision for future taxation and reversal of tax at future date, done under the concept of minimum alternate tax (MAT), leads to creation of deferred tax liability. In this case, a bank is allowed to defer taxes on a percentage of its income and report this amount as a DTL on its balance sheet. When the tax is due, there will be an equal amount reduction in the DTL item and the cash and cash equivalents account on the balance sheet.  However, the DTL paid will not be used to tax treatment of subsequent year as the benefit of same has already been availed in the previous year.