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MAT Credit – An overview of its rationale and impact

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     on  06 October 2007    

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“There was an era when the corporate entities mocked at the income tax department, since they had sizeable profits as per the accounting books but ended up contributing nothing to the coffers of the department. Taking the tax provisions to their advantage they always suffered a loss for tax purposes. To bring such companies into the tax ambit the tax department devised a tool in the form of “Minimum Alternate Tax”.

 

What is MAT – Minimum Alternate Tax

 

MAT is a tax that has to be paid by the companies that are enjoying tax benefits or tax exemption under various schemes. Under this they have to pay a particular amount of tax termed as MAT (Minimum Alternate Tax), so they come under the tax net.

 

Applicability of MAT

 

Section 115JA was applicable for the assessment years 1997-98 to 2000-01. It provided that in the case of a company if the total income as computed under the Income Tax Act, was less than 30 percent of the “book profit”, the total income of such assessee, shall be deemed to be 30 percent of the book profit.

 

Section 115JB has been inserted from the A.Y 2001-02. It provides that in case the tax liability of a company is less than 7.5% (10% from A.Y 2007-08 [SC+EC] of the book profit, such book profit shall be deemed to be the ‘total income’ chargeable to tax at the rate of 7.5 percent (10 percent from the A.Y 07-08) [SC+EC]

 

The provisions of Sec 115JB are however not applicable to the income from any business carried on, or services rendered, by an entrepreneur or a Developer, or a unit in Special economic Zone.

 

Reason for introducing MAT

 

There were large number of companies who had book profits as per their profit and loss account but were not paying any tax because income computed as per provisions of the Income Tax Act, 1961 was either nil or negative or insignificant. In such case, although the companies were showing book profits and declaring dividends to the shareholders, they were not paying any income tax. These companies are popularly known as Zero Tax companies. In order to bring such companies under the Income Tax Act net, section 115JA was introduced w.e.f assessment year 1997-98.

 

MAT Credit

 

A new tax credit scheme is introduced by which MAT paid can be carried forward for set-off against regular tax payable during the subsequent seven year period  subject to certain conditions, as under:-

  • When a company pays tax under MAT, the tax credit earned by it shall be an amount which is the difference between the amount payable under MAT and the regular tax. Regular tax in this case means the tax payable on the basis of normal computation of total income of the company.
  • MAT credit will be allowed carry forward facility for a period of seven assessment years immediately succeeding the assessment year in which MAT is paid. Unabsorbed MAT credit will be allowed to be accumulated subject to the seven year carry forward limit.
  • In the assessment year when regular tax becomes payable, the difference between the regular tax and the tax computed under MAT for that year will be set off against the MAT credit available.
  • The credit allowed will not bear any interest.

MAT credit can be better explained with the help of an illustration. So let’s try to understand it with the help of an example:

Particulars

06-07

07-08

08-09

09-10

10-11

11-12

12-13

Book Profit

Taxable income (ignoring Sec 115 JB)

Tax on (1) @ 10% (7.5% for AY 06-07) (+SC+EC)

Tax on (2) @ 30% (+SC+EC)

Whether tax credit is available

Amount of credit available

Cumulative credit for being set-off

Whether brought forward tax credit can be set-off during the current year

Maximum amount which can be set-off during the current year

Credit which is lapsed

How much can be carried forward

 

 

225.00

52

18.93

 

17.50

Yes

1.43

1.43

 

NA

 

-

 

NA

1.43

215.00

65

24.12

 

21.88

Yes

2.24

3.67

 

NA

 

-

 

NA

3.67

200.00

72

22.44

 

24.24

No

Nil

3.67

 

Yes

 

1.80

 

Nil

1.88

185.00

-40

20.76

 

Nil

Yes

20.76

22.64

 

NA

 

-

 

NA

22.64

 

170.00

54

19.07

 

18.18

Yes

0.90

23.53

 

NA

 

-

 

NA

23.53

145.00

55

16.27

 

18.51

No

NA

23.53

 

Yes

 

2.24

 

Nil

21.29

 

115.00

45

12.90

 

15.15

No

NA

21.29

 

Yes

 

2.24

 

Nil

19.05

 

 

Accounting treatment:

 

(1) Whether MAT credit is a deferred tax asset:

 

It has been proved that payment of MAT, does not result in any timing difference since it does not give rise to any difference between the accounting income and taxable income. According to AS 22 Deferred Tax Asset arise on account of differences in the items of income and expenses credited in the P&L a/c. In view of this, it is not appropriate to consider MAT Credit as Deferred tax asset for the purposes of AS 22

 

(2) Whether MAT credit can be considered as an ‘Asset’?

 

 Under Accounting Standard (AS) 22 discussed above, though MAT credit is not a deferred tax asset, an expectation regarding future economic benefit arises in the form of the adjustment of the future Income-Tax Liability (that arises within a specified time period). Whether or not, MAT credit can be considered as an ‘Asset’ is the basic question that arises; and also just in case it is considered to be an ‘asset’, henceforth how should it be recognized in the ‘Financial Statements’?

The tax paid in a year in respect of which the credit is allowed during a specific period of time under the Act is a resource controlled by Company itself as a result of a past event i.e., the payment of MAT. Such a credit has an expected future economic benefit in the form of its adjustment against the discharge of the normal Tax liability, provided it arises within a specified time period. In accordance with the above, MAT Credit is an ‘Asset’. Therefore, MAT credit can be recognized as an asset, only when and to the extent there is convincing evidence that the company will pay normal Income-Tax during the specified period. Such evidence may exist for example, where a company has, in the current year deferred tax liability because its depreciation for Income-Tax purposes is higher than the depreciation for accounting purposes; but from the next year onwards the scenario is the reverse, thereby resulting in the reversal of the deferred tax liability to an extent that the company becomes liable to pay Normal Income-Tax.

 

 

(3) Presentation of MAT credit in the financial statements:

 

Balance Sheet

   

      Where a company recognizes MAT credit as an asset the same should be presented under the head ‘Loans & Advances’ since, there being a convincing evidence of realization of the asset, it is of the nature of  a pre-paid tax which would be adjusted against the normal income tax during the specified period. The asset may be reflected as ‘MAT credit entitlement’.

      

 In the year of set-off of credit, the amount of credit availed should be shown as deduction from the ‘provision of Taxation’ on the liabilities side of the balance sheet. The unavailed amount of MAT credit entitlement, if any, should continue to be presented under the head ‘Loans & Advances’.

 

Profit & Loss Account:   

 

According to paragraph 6 of Accounting Standards Interpretation (ASI) 6, ‘Accounting for Taxes on Income in the context of Section 115JB of the Income Tax Act, 1961’, issued by the Institute of Chartered Accountants of India, MAT is the current tax. Accordingly, the tax expense arising on account of payment of MAT should be charged at the gross amount, in the normal way, to the profit & loss account in the year of payment of MAT. In the year in which MAT credit becomes eligible to be recognized as an asset in accordance with recommendations contained in this Guidance Note, the said asset should be created by way of a credit to the profit & loss account & presented as a separate line item therein

 

 

 

 

 

 

 

Published in Audit
Source : The Articled
Views : 34236

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