Accounting and Provisions of Minimum Alternate Tax (MAT)

Chapter XIIB of the Income Tax Act, 1961 covers Minimum Alternate Tax U/s. 115JB, which covers cases under ‘Special Provision for Payment of tax by certain companies’.. The relevant extract of this section is produced below:

(1) Notwithstanding anything contained in any other provision of this Act, wherein the case of an assessee, being a Company, the income tax payable on the total income as computed under this Act in respect of any previous year relevant to assessment year commencing on or after 01.04.2007 is less than 10% of its  Books 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 income tax at the rate of 10%.

(2) Every assessee, being a company, shall, for the purposes of this section, prepare its Profit and Loss Account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956.

The Minimum Alternate Tax (MAT) so paid is termed as MAT Credit. The MAT credit is available in respect of MAT paid under Section 115JB of the Income Tax Act, 1961 with effect from Asst. Year 2006–2007. The amount of MAT credit would be equal to the excess of MAT over normal income-tax liability for which MAT is paid during the said assessment year. The amount of MAT credit can be set-off only in the year in which the company is liable to pay tax as per the normal provisions contained in the act and such tax is in excess of MAT for that year.

The amount of set-off would be to the extent of excess of normal income-tax over the amount of MAT. There are two schools of thoughts about the provisions of MAT. MAT credit may be considered as a Deferred Tax Asset for the purpose of Accounting Standard (AS) – 22, which relates to Accounting for taxes on income.

However, when the MAT credit is not considered as a Deferred Tax Asset, it is still to be considered as an ‘asset’ and the same should be classified under the head ‘Loans and Advances’. This is on the assumption that MAT credit is nothing but a sort of PREPAID TAXES. The MAT credit may however, be shown separately as MAT CREDIT ENTITLEMENT ACCOUNT.

The following entries are relevant in this context:

(a) For recognising MAT CREDIT as an Asset:

MAT Credit Entitlement Account Dr.

To Profit and Loss Account

(b) At the time of availment of MAT Credit:

Provision for Taxation Account Dr.

To MAT Credit Entitlement Account

(c) At the time  of writing down of MAT Credit Entitlement:

Profit and Loss Account Dr.

To MAT Credit Entitlement Account

The difference arising out of MAT paid and MAT Credit Entitlement can be treated as TAX PAID during the year.

It must also be noted that Deferred Tax Charge is not covered by any other clause of the Explanation to section 115JB(2) and is therefore not required to be added back in the computation of book profits for the purpose of Section 115JB.