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Date: 7 May 2008 |
Compiled by Mr. M. Sathya Kumar |
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Accounting Treatment
for MAT Credit 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 Computation of Book Profit and 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:
Accounting Treatment:
The Guidance Note on Accounting for MAT credit suggests the
following: ·
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. ·
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:
· 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. 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:
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 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 In the Balance Sheet, MAT Credit Availed should be shown as
deduction from ‘Provision for Taxation’ on the
Liabilities side. Coutesy : CA. Kamal Garg , The author is a
member of the Institute |
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