Tax deferment is the postponement of liability to pay tax from a present date to a future date.
In case of Capital Expenditure
The deferment arises because of depreciation rate differences between the Income Tax Act, 1961 and the Companies Act, 2013. Let us assume that a company purchases a server at a cost of Rs.10.00 lakh.
(Amounts in Rs.)
| Year | Depreciation (@15.83% for 6 years) – Companies Act, 2013 | Depreciation (@60%) – Income Tax Act, 1961 | Impact on taxable profit |
| First | 158300 | 600000 | Lower by 441700 |
| Second | 158300 | 400000 | Lower by 241700 |
| Third | 158300 | 0.00 | Higher by 158300 |
| Fourth | 158300 | 0.00 | Higher by 158300 |
| Fifth | 158300 | 0.00 | Higher by 158300 |
| Sixth | 158300 | 0.00 | Higher by 158300 |
In the first and second years, the profits reported for taxation are lower and the company pays less tax. But, in later years, the company pays higher tax as profit reported is higher because there is no residual depreciation to be claimed while filing tax returns. Thus, the company defers tax payment to subsequent years. This encourages investment in capital goods and allows companies time to stabilize operations by the time increased tax becomes payable.
In case of Income
Tax deferment is also built into financial instruments such as National Savings Certificates. Every year accrued interest is added to income but, as it is deemed to be reinvested, it is also allowed as a deduction. However, at the time of maturity, the interest is taxable because there is no deemed reinvestment. Thus, tax liability is deferred to a future date when tax rates could be lower or the individual may be in better position to shoulder the tax burden.
