MAT Credit Concepts and Accounting

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:

Notwithstanding anything contained in any other provision of this Act, where in 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 the assessment year commencing on or after the 1st day of April, 2012, is less than eighteen and one-half per cent 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 income-tax at the rate of eighteen and one-half per cent:

Provided that for the previous year relevant to the assessment year commencing on or after the 1st day of April, 2020, the provisions of this sub-section shall have effect as if for the words “eighteen and one-half per cent” occurring at both the places, the words “fifteen per cent” had been substituted.

The concept of MAT (Minimum Alternate Tax) was introduced as the companies were declaring losses to avoid the tax payments.

The companies are required to compute tax payable as follow:

(A) Tax computed per normal provisions of Income tax Act Or

(B) Tax payable as per MAT Provisions computed u/s 115JB of Income Tax Act, 1961.

(A) or (B), whichever is higher.

MAT credit should be accounted in the books as it satisfies the definition of Asset as per the “Framework for preparation and presentation of Financial Statements.”

Asset is defined as a resource controlled by an enterprise as a result of past events from which future economic benefits are expected to flow to the enterprise.

Accounting Treatment in Books of Account of the Company:

Example: For FY 2018-19, the tax payable by the company ABC Ltd. as per normal provisions is Rs.80, whereas the tax payable as per MAT Provisions is Rs.100/-. Pass the Journal Entries.

As per the definition of asset, MAT Credit has to be recognised in the books of account. In the present case the company is entitled to MAT Credit of Rs.20/- Rs.(100-80)

The entry to be passed for availment of MAT credit is:

MAT Credit (Assets) Dr… 20

To MAT Credit (Profit and Loss) 20

(Being MAT Credit availed in books for FY 2018-19)

Since the company has tax expenses for FY 2018-19, the same has to be shown in Financials. The entry for the same would be:

Current Tax (PL) Dr…100

To Provision for Tax (Short Term Provisions) 100

(Being tax expenses booked for FY 2018-19)

As on 31.03.2019, the presentation in the financials of ABC Ltd. would be:

Statement of Profit and Loss of ABC Ltd for the year ended 31.03.2019

Tax Expenses:

Balance Sheet of ABC Ltd. as on 31.03.2019

The tax payment is made while filing the return. Assuming the return of income is filed on 15.09.2019 for FY 2018-19, the company has to pay the tax of Rs.100/-. The payment is done in FY 2019-20.

The accounting entry at the time of payment of entry in FY 2019-20 would be:

Provision for Tax Dr.. 100

To Bank Account….100

(Being payment of tax made for FY 2018-19)

As on 16.09.2020, the books will have MAT Credit (Asset) of Rs.20/-

Continuing the above example, For FY 2019-20, the tax payable by the company ABC Ltd. as per normal provisions is Rs.180, whereas the tax payable as per MAT Provisions is Rs.70/-. Pass the Journal Entries.

For FY 2019-20, since the tax payable as per normal provisions is more as compared to MAT provisions, the MAT Credit can be utilised while making the tax payment for FY 2019-20.

The entry to be passed for utilisation of MAT credit would be:

MAT Credit (Profit and Loss) 20

To MAT Credit (Assets)… 20

(Being MAT Credit utilised in books for FY 2019-20)

Since the company has tax expenses for FY 2019-20, the same has to be shown in Financials. The entry for the same would be:

Current Tax (PL) Dr…90

To Provision for Tax (Short Term Provisions) 90

(Being tax expenses booked for FY 2019-20) Rs. 90 = Rs.(180 – 70 – 20)

The expense debited to the Profit and Loss for FY 2019-20 would be Rs.110 (Rs.90+ Rs.20)

As on 31.03.2020, the presentation in the financials of ABC Ltd. would be:

Statement of Profit and Loss of ABC Ltd for the year ended 31.03.2020

Tax Expenses:

Balance Sheet of ABC Ltd. as on 31.03.2020

The tax payment is made while filing the return. Assuming the return of income is filed on 18.09.2020 for FY 2019-20, the company has to pay the tax of Rs.110/-. The payment is done in FY 2020-21.

Rs.20 of MAT Credit is utilised while making the payment and balance has to be paid in FY 2020-21.

The accounting entry at the time of payment of entry in FY 2020-21 would be:

Provision for Tax Dr.. 90

To Bank Account….90

(Being payment of tax made for FY 2019-20)

As on 19.09.2020, the books will have MAT Credit (Asset) of Rs.0/- and Provision for tax as Rs.0/-

The views expressed above are purely for educational purpose.