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August 2008

Gaps in GAAP – Accounting for MAT Credit

By Dolphy D’Souza, Chartered Accountant
Reading Time 5 mins

Accounting Standards

The Finance Act, 2000, w.e.f. 1-4-2001, introduced S. 115JB
according to which a company is liable to pay MAT under the provisions of the
said section in respect of any previous year relevant to the assessment year
commencing on or after the 1st day of April, 2001. The MAT under this Section is
payable where the normal income-tax payable by such company in the previous year
is less than 10% of its book profit which is deemed to be the total income of
the company. Such company is liable to pay income-tax at the rate of 10% of its
book profit. The Finance Act, 2005, inserted Ss.(1A) to S. 115JAA, to grant tax
credit in respect of MAT paid u/s.115JB of the Act with effect from A.Y.

The salient features of MAT credit u/s.115JAA as applicable,
in respect of tax paid u/s.115JB, are as below :

(a) A company, which has paid MAT, would be allowed credit
in respect thereof.

(b) The amount of MAT credit would be equal to the excess
of MAT over normal income-tax for the assessment year for which MAT is paid.

(c) No interest is allowable on such credit.

(d) The MAT credit so determined u/s.115JB can be carried
forward up to seven succeeding assessment years.

(e) 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 of
the Act and such tax is in excess of MAT for that year.

(f) The amount of set-off would be to the extent of excess
of normal income-tax over the amount of MAT calculated as if S. 115JB had been
applied for that assessment year for which the set-off is being allowed.

Whether MAT credit can be considered as an asset ?

As per the “Guidance Note on Accounting for Credit
Available in Respect of Minimum Alternative Tax Under the Income-tax Act, 1961″,
issued by the Council of the Institute of Chartered Accountants of India
although MAT credit is not a deferred tax asset under AS-22, yet it gives rise
to expected future economic benefit in the form of adjustment of future
income-tax liability arising within the specified period. A question, therefore,
arises whether the MAT credit can be considered as an ‘asset’ and in case it can
be considered as an asset, whether it should be so recognised in the financial

MAT paid in a year in respect of which credit is allowed
during the specified period under the Act is a resource controlled by the
company as a result of past event, namely, the payment of MAT. MAT credit has
expected future economic benefits in the form of its adjustment against the
discharge of the normal tax liability if the same arises during the specified
period. Accordingly, the Guidance Note concluded that MAT credit is an ‘asset’.
However, it 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.

MAT credit should be recognised 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, a deferred tax liability because its
depreciation for the income-tax purposes is higher than the depreciation for
accounting purposes, but from the next year onwards, the depreciation for
accounting purposes would be higher than the depreciation for income-tax
purposes, thereby resulting in the reversal of the deferred tax liability to an
extent that the company becomes liable to pay normal income-tax.

EAC Opinion :

The Expert Advisory Committee has addressed the MAT issue in
the Compendium of Opinions, Volume XXV, Query No. 24, titled ‘Creation of
deferred tax asset in respect of MAT credit under Ss.(1A) of S. 115JAA of the
Income-tax Act, 1961.’ The EAC noted that payment of MAT does not result in any
timing differences, since it does not give any rise to any difference between
accounting income and taxable income which are arrived at before adjusting the
tax expense; viz., MAT in this case. Accordingly, it would not be correct
to recognise any deferred tax asset in respect of MAT under AS-22. The author
agrees with this view.

However, unfortunately the EAC has remained silent on whether
MAT credit can be recognised as other asset if not as deferred tax asset. In the
opinion of the author, the answer is in the affirmative in light of the
recommendations of the Guidance Note discussed above. The author recommends that
in future in order to remove any scope for doubt or confusion, the EAC should
respond to queries comprehensively.

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