Deferred Tax Conundrum

My understanding of Deferred Taxes after reading literature and annual reports

“We would see an entry “Provision for Taxes” in almost all the P&L account of companies. This heading would generally have Subheads like “Current Taxes”, “Fringe Benefit Taxes”, “Wealth Taxes”, “Deferred Taxes (Either Asset or Liability). Now this either Asset or Liability is confusing and let me explain what I understand. While calculating the profit after tax, we REDUCE ALL these provisions from the “Income BEFORE taxes/Profit (Loss) BEFORE taxes. Now if an entry is a Deferred Tax ASSET, then it should INCREASE the profit after tax. Which is another way of saying that it should INCREASE the profit(loss)/income BEFORE tax as well. Therefore as we are REDUCING these provisions, for this Deferred Entry to INCREASE PAT and hence be termed as a Deferred Tax ASSET it should have a NEGATIVE sign in front of it so that when it is REDUCED from PBT it in a way gets ADDED to the PBT and hence increase PAT. Let me explain it using some numbers.

See here that the Deferred Tax has a NEGATIVE value (-9005000), therefore when ALL the provisions are REDUCED/SUBTRACTED from PBT (259,092,856) to derive PAT, the Deferred Tax being NEGATIVE gets ADDED to PBT and hence it INCREASES the value of PAT. Therefore the REDUCTION process of Provision effectively becomes

259092856 – 66195845 – 4887171 – (-9005000) , which is same as

259092856 – 66195845 – 4887171 + 9005000 = 197014840.

Therefore as the Deferred Tax value gets ADDED to the PBT (in a way) we conclude it’s a Deferred Tax ASSET. Or vice versa, if we see a P&L entry of Taxation Provision having a NEGATIVE value for Deferred Tax Entry (without saying whether its an ASSET or a LIABILITY) we can say that as the Deferred Tax value given has a NEGATIVE sign, its an ASSET and NOT a LIABILITY.

Had the Deferred Tax value being 9005000 (and not -9005000) we would have calculated the PAT as

259092856 – 66195845 – 4887171 – 9005000 = 179,004,840 (less than 197014840)

In this case the Deferred Tax value (9005000) is REDUCED from PBT and the final PAT value comes out to be 179,004,840, which is less than the PAT value we found when the Deferred Tax value was -9005000. Therefore we would have called that 9005000 value as a Deferred Tax LIABILITY, as it reduced our PAT.