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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:

  • Tax computed per normal provisions of Income tax Act Or
  • 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 because 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 must be recognized in the books of account. In the present case the company is entitled to MAT Credit of Rs.20/- Rs.(100-80)

Since the company has tax expenses for FY 2018-19 and the same must be paid before filing the ROI. 

Journal Entry

Current Tax (PL) Dr…100

MAT Credit (Asset) Dr..20

To MAT Credit (PL)………………………………………………..20

To Provision for Tax (Short Term Provisions)……..100

(Being tax expenses and MAT Credit recognized for FY 2018-19, assuming the payment is done for Rs.100)

Payment Entry of Taxes:

Provision for Tax (Short Term Provisions) 100

To Bank…………………………………………………………………100

Presentation of Statement of Profit and Loss for the year ended 31.03.2019
Particulars Amount Amount
Net Profit before tax 300
Tax Expenses*
i) Current Tax Expenses 100
ii) MAT Credit Entitlement -20
Total Tax Expenses   80
Net Profit after Tax 220
 *The major point to be observed is Net impact to tax expenses is Rs.80 (100-20) as Rs.20 is MAT asset which can be utilized in future periods.
 Balance Sheet of ABC Ltd. as on 31.03.2019
Particulars Amount
Liabilities
Provision for Tax 100
Assets
MAT Credit Entitlement 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 Journal Entries.

Journal Entry

Current Tax (PL) Dr…………………..160

MAT Credit (Profit and Loss) Dr… 20

To MAT Credit (Assets)……………………………………………20

To Provision for Tax (Short Term Provisions)……….160

(Being Provision for Tax and MAT utilization entries passed for FY 19-20)

Presentation of Statement of Profit and Loss for the year ended 31.03.2020.

Particulars Amount Amount
Net Profit before tax 350
Tax Expenses
i) Current Tax Expenses 160
ii) MAT Credit Entitlement 20
Total Tax Expenses:   180
Net Profit after Tax 170

 *The expense debited to the Profit and Loss for FY 2019-20 would be Rs.180 (Rs.160+ Rs.20) 

Balance Sheet of ABC Ltd. as on 31.03.2020

Particulars Amount
Liabilities
Provision for Tax 160
Assets
MAT Credit Entitlement -20

*****

The views expressed above are purely for educational purposes. The author can be reached to +91 87224 91666.

(Republished with amendments)

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10 Comments

  1. Jaydeep Bagalkote says:

    Due to introduction of new tax regime Companies will not be able claim previouse Mat credit and it has to be reversed. Whether this entry need to be routed through profit and loss account by increasing tax expenses? Or can we directy debit the same to retained earning and disclose it under the statement of changes in other equity

  2. Akhil N says:

    Yes , i would also like to have clarity that why Rs 70 is be reduced from 180 as only higher is to be paid in full. Tax payable should be Rs 180- 20 Net total 160 .

  3. Hitesh Sanghvi says:

    How come tax Liability is 110?

    Eg clearly states tax Liability of 180
    So payment from bank has to be of 160 after 20 adj of mat credit

    Pls clerify

    1. Sai Sharan says:

      Because the tax liability is Rs.110 for FY 2019-20, out of which Rs.20 is reversal of MAT credit (i.e, debited to the Profit and Loss Account which is an expense) and the balance of Rs.90 is to be debited to the Profit and Loss, resulting in total tax expense to Rs.110/- for FY 2019-20.

      Hope this clarifies.

      1. narendra says:

        I think you need to recheck that phara starting with “continuing the above example”, where it is mentioned as tax payable as per normal provision is Rs. 180.

        Pls don’t mind, i am just trying to understand on that part.

      2. Narayan says:

        Yes, I agree with the other comments. Something is off with the para where you say income for 19-20 is 180. If it is 180, then why reduce 70. tax payable should be higher of 180 (IT act) or 70 (MAT). So here it is 180 and from that you have to reduce 20 which is MAT credit and the balance should be 160.

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