Accounting for MAT credit

Introduction

Taxes can be difficult to understand let alone their accounting and reporting. However, accounting for taxes is one aspect that needs to be given more time in order to ensure that correct treatment is given to the taxes paid and/or payable. One matter that i personally feel that most of us would not be dealing with on a regular basis is the accounting for Minimum Alternate Tax ('MAT') and MAT credit. Without going into the mechanics of computation of MAT, in the following paragraphs i would attempt on throwing some light on the accounting aspect of MAT and its credit.

Basics

1. MAT is computed at 18.5% of the book profits computed in accordance with the provisions of section 115JB of the Income Tax Act, 1961.

2. Income tax payable computed according to the normal provisions of the income tax is compared with the MAT calculated according to the provisions of section 115JB of the Income tax Act, 1961.

3. If, MAT payable > Normal Income tax payable then, the assessee will pay MAT during the year and vice versa.

4. The difference between MAT paid and normal income tax payable will be the MAT credit. Refer illustration below:

Illustration 1:

Normal income tax = Rs. 100

MAT payable = Rs. 150

Assessee will pay MAT of Rs. 150

MAT credit will be Rs. 50 (150-100)

5. MAT credit can be carried forward for a period of 15 years after which it will lapse.

Recognising MAT credit as an asset 

According to The Framework for the Preparation and Presentation of Financial Statements, issued by the Chartered Accountants of India, an asset is recognised in the Balance Sheet when it is probable that the future economic benefits associated with it will flow to the enterprise and the asset has a cost or value that can be measured reliably.

Simply put, the above text states that MAT credit will be recognised as an asset when it is probable that it (asset) will be utilised in the future financial years. 

Therefore practically the accounting policy for recognising MAT credit is drafted in a fashion similar to the text below:

"MAT credit is recognised as an asset to the extent there is a convincing evidence that the company will pay normal tax during the specified period"

Accounting entries
Following accounting entries will be passed

a. At the time of recognising asset

MAT credit entitlement              Dr
  To SPL                                     Cr

b. At the time of utilisation of asset

Tax payable                               Dr
  To MAT credit entitlement      Cr


Presentation of MAT credit in Financial Statements

Balance Sheet
MAT credit should be presented under loans and advances as ' MAT credit entitlement'.

Statement of Profit and Loss

In the year in which MAT credit becomes eligible to be recognised as an asset the said asset should be created by way of a credit to the statement of profit and loss account and presented as a separate line item.