1. A deferred tax liability occurs when a business has a certain amount of income for an accounting period and that amount is different from the taxable amount on their tax return. Deferred tax typically refers to liabilities, wherein the amount entered on the balance sheet is payable at a future time. Deferred Tax Liability (DTL) or Deferred Tax Asset (DTA) forms an important part of Financial Statements. This adjustment made at year-end closing of Books of Accounts affects the Income-tax outgo of the Business for that year as well as the years ahead

2. The general principle in IAS 12 is that a deferred tax asset is recognised for unused tax losses and unused tax credits to the extent that it is probable that future taxable profit will be available against which the unused tax losses and unused tax credits can be utilised

Deferred tax (DT) from the timing difference that reverses during the tax holiday period should not be recognised during the enterprises tax holiday period. DT related to the timing difference that reverses after the tax holiday has to be recognised in the year of origination.

With respect to timing differences related to unabsorbed depreciation or carry forward losses, DTA is recognised only if there is future virtual certainty. It means DTA can be realised only when the company reliably estimates sufficient future taxable income. This test for virtual certainty has to be done every year on balance sheet date and if the condition is not fulfilled, such DTA/DTL should be written off.

In the case of tax-free companies, deferred tax liability is not recognised, for the timing differences that originate and reverse in the tax holiday period. Deferred tax liability is created only when the timing differences originate in the tax holiday period and reverse after the tax holiday. Adjustments are done on the basis of the FIFO method.