|
| |
Accounting Treatment for MAT Credit
By Kamal Garg
|
| |
|
|
The Council of Institute of Chartered Accountants of India has issued a 'Guidance Note on Accounting for Credit Available In Respect of Minimum Alternative Tax (MAT) under the Income Tax Act, 1961'. This write up tries to demystify the said accounting treatment in the following paragraphs.
|
| |
| Legal Provisions: |
As per Section 115JB of the Income Tax Act, 1961, where in the case of a company, the income tax payable on the total income as computed under the Income Tax Act in respect of the relevant previous year is less than 7.5% of its book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of the income tax at the rate of 7.5%. This tax computed u/s 115JB is Minimum Alternative Tax or MAT.
This Section 115JB involves the following
1. |
Computation of Book Profit; and |
2. |
Computation of MAT. |
Further as per Section 115JAA, credit of MAT would be available if the tax payable on total income is higher than the tax computed on the book profits. The amount of MAT credit would be available to the extent of excess of MAT over normal income tax for the assessment year for which MAT is paid. |
| |
| Computation of Book Profit:
|
The Book Profit for the purpose of Section 115JB is calculated as follows: |
| |
| Other Provisions:
|
|
1. |
The MAT credit as computed above is available for set off against the tax on total income computed as per normal income tax provisions in the year in which the company is liable to pay tax as per normal provisions.
|
2. |
Such credit would be available for a period of five years (seven years as per Finance Bill, 2006) succeeding the assessment year from the year in which MAT credit becomes available.
|
3. |
No interest is to payable on the carried forward tax credit.
|
|
| |
| Accounting Treatment:
|
The Guidance Note on Accounting for MAT credit suggests the following:
1. |
MAT credit is not a Deferred Tax Asset - As per AS - 22 on Accounting for Taxes on Income issued by ICAI, deferred tax liability or deferred tax asset arises on account of timing differences (i.e. the differences between taxable income and accounting income for a period that originate in one period and are capable of reversal in one or more subsequent periods). Further, MAT credit does not give rise to any timing difference. It is simply a current tax. Hence, MAT is not a deferred tax asset.
|
2. |
MAT credit is an Asset - An asset is a resource that is controlled by the enterprise as a result of past events from which future economic benefits are expected to flow to the enterprise. Now, the following questions arise as to whether MAT credit:
- is a resource that is controlled by the enterprise as a result of past events - Yes, it is a resource controlled by the enterprise as a result of payment of MAT in past.
- give rise to future economic benefits that are expected to flow to the enterprise - Yes, it give rise to future economic benefits. The future benefit is in the form of adjustment that can be made while discharging the normal tax liability.
|
3. |
Recognition of MAT credit in Financial Statements – Since MAT credit is an asset, it can be recognised in the financial statements if the following conditions are fulfilled:
- It is probable that the future economic benefits will flow to the enterprise; and
- Its value can be measured reliably.
|
|
| |
Current Years |
| Particulars |
Normal Provisions |
MAT Provisions
|
Net profit as per P & L A/c |
10,00,000 |
9,00,000 |
Depreciation |
6,00,000 |
1,00,000 |
B/f business losses (whole lose is absorbed |
4,00,000 |
- |
Total Income/Book Profit |
Nil |
8,00,000 |
Tax liability (ignoring surcharge, cess) |
Nil |
60,000 |
Tax Payable |
Rs. 60,000
|
As the tax computed under MAT provisions is higher than the tax as per normal provisions, tax payable is Rs. 60,000 (i.e. MAT @7.5% of Rs. 8,00,000 book profit) |
MAT credit c/f = Tax on Book Profit minus Tax on Total Income = Rs. 60,000 - Rs. Nil = Rs. 60,000 |
Subsequent Year
|
| Particulars |
Normal Provisions |
MAT Provisions
|
Net profit as per P & L A/c |
10,00,000 |
9,00,000 |
Depreciation |
4,00,000 |
80,000 |
Total Income/Book Profit |
6,00,000 |
8,20,000 |
Tax liability (ignoring surcharge, cess) |
1,80,000 |
61,500 |
Tax payable (before taking MAT credit) |
Rs. 1,80,000 |
As the tax computed under normal provisions is higher than the tax as per MAT provisions, tax payable is Rs. 1,80,000 (i.e. 30% of Rs. 6,00,000 total income) |
Tax payable (after taking MAT credit) = Rs. 1,80,000 - Rs. 60,000 = Rs. 1,20,000 |
The probability (i.e. more likely than not) is assessed on the basis of concept of prudence and on the basis of evidence available while preparing the financial statements. Thus, MAT credit should be recognised as an asset in the financial statements only to the extent of convincing evidence available that the company will be paying tax as per normal provisions during the period for which MAT credit can be carried forward. This can be understood from the following example:
We can see from above that there is convincing evidence, i.e. the business losses can not be carried forward to subsequent year. As a result of this, in the subsequent year, the company would be paying tax as per normal provisions and can take the benefit of MAT credit. Thus, MAT credit should be recognised as an asset in the financial statements of the current year.
The following scheme of journal entries and disclosure would take place: |
|
| |
| In the Current Year:
|
MAT Credit Entitlement A/c Dr To Profit and Loss A/c
(with the amount of MAT credit available, i.e. Rs. 60,000)
The account head 'MAT Credit Entitlement' should be shown in the Balance Sheet under the head 'Loans and Advances' on the Assets side. |
| |
| In the Subsequent Year (i.e. the year of set off):
|
MAT Credit Availed A/c Dr To MAT Credit Entitlement A/c
(with the amount of credit availed. In our case it is whole of Rs. 60,000)
In the Balance Sheet, MAT Credit Availed should be shown as deduction from ‘Provision for Taxation’ on the Liabilities side.
|
| |
The author is a member of the Institute. The views expressed herein are his personal views and do no necessarily represent the views of the Regional Council |
| |
|
|
|
|
|
|
|
