Current Tax Liability: Current tax liability refers to the amount of income tax that a company or individual is obligated to pay to the tax authorities based on the taxable income for the current accounting period. It represents the income tax expense that is payable within the current financial year.
Key points about current tax liability:
Timing: Current tax liability relates to the income tax obligation for the current financial year, which is typically one year or less.
Recognition: Current tax liability is recognized and reported as a current liability on the balance sheet because it is due for payment in the short term, usually within the next 12 months.
Calculation: The current tax liability is calculated based on the tax laws and rates applicable to the company’s taxable income for the current year. It considers income, deductions, exemptions, and other relevant tax provisions.
Deferred Tax Liability: Deferred tax liability, on the other hand, refers to the income tax that a company or individual will owe in future accounting periods due to temporary differences between the financial accounting and tax accounting treatment of certain items. It represents the tax obligation that has been deferred to future periods because of these differences.
Key points about deferred tax liability:
- Timing: Deferred tax liability relates to the income tax obligation that will arise in future years when temporary differences reverse.
- Recognition: Deferred tax liability is recorded on the balance sheet as a non-current liability because it represents the tax obligation that will not be paid within the current financial year.
- Calculation: Deferred tax liability is calculated by identifying temporary differences between the carrying amount of assets and liabilities in the financial statements and their corresponding tax bases. The tax impact of these temporary differences is then determined using applicable tax rates.
In summary, current tax liability represents the income tax obligation for the current financial year and is recorded as a current liability on the balance sheet. On the other hand, deferred tax liability represents the tax obligation that will arise in future years due to temporary differences and is recorded as a non-current liability on the balance sheet. Both current and deferred tax liabilities are essential in accurately reflecting a company’s tax position and ensuring proper compliance with tax regulations.