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Guidance Note on MAT Credit

Written By Admin on Thursday, 31 October 2013 | Thursday, October 31, 2013



GUIDANCE NOTE ON
ACCOUNTING FOR CREDIT AVAILABLE IN RESPECT OF MINIMUM
ALTERNATIVE TAX UNDER THE INCOME-TAX ACT, 1961



(The following is the text of 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.)

INTRODUCTION

1. The  Finance  Act,  1997,  introduced  section  115JAA  in  the  Income-Tax  Act,  1961 (hereinafter referred to as the ‘Act’) providing for tax credit in respect of MAT paid under section 115JA (hereinafter referred to as ‘MAT credit’) which could be carried forward for set-off for five succeeding years in accordance with the provisions of the Act. Section 115JA was  inserted  by  the  Finance  Act,  1996,  w.e.f.  1.4.1997. The  said  section  provided  for payment of Minimum Alternative Tax (hereinafter referred to as ‘MAT’) by certain companies, where the total income, as computed under the Income-tax Act, 1961 (hereinafter referred  to  as  the  ‘Act’),  in  respect  of  any  previous  year  relevant  to  the  assessment  year commencing on or after 1st  day of April, 1997, but before the 1st  day of April, 2001, was less than 30% of its book profit.  In such a case, the total income of the company chargeable to tax for the relevant previous year was deemed to be an amount equal to thirty per cent of its book profit.

2. The Finance Act, 2000, w.e.f. 1.4.2001, introduced section 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 7.5 per cent (10 per cent proposed by the Finance Bill, 2006) 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 7.5 per cent (10 per cent proposed by the Finance Bill, 2006) of its book profit. The Finance Act, 2005, inserted sub-section (1A) to section 115JAA, to grant tax credit in respect of MAT paid under section 115JB of the Act with effect from assessment year 2006-07.

3. The salient features of MAT credit under section 115JAA as applicable, in respect of tax paid under sections 115JA and 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  can  be  carried  forward  for  set-off  for  five succeeding  assessment  years  from  the  year  in  which  MAT  credit  becomes allowable. The Finance Bill, 2006, has proposed that credit in respect of MAT paid  under  section  115JB  can  be  carried  forward  upto  seven  succeeding assessment years (hereinafter referred to as the ‘specified period’).

(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 section 115JB had been applied for that assessment year for which the set-off is being allowed.

ACCOUNTING TREATMENT

Whether MAT credit is a deferred tax asset

4. An issue has been raised whether the MAT credit can be considered as a deferred tax asset  within  the  meaning  of  Accounting  Standard (AS) 22, Accounting for Taxes on Income, issued  by  the  Institute  of  Chartered  Accountants  of  India. In  this  context,  the  following definitions given in AS 22 are noted:

“Timing differences  are the differences between taxable income and accounting income for a period that originate in one period and are capable of reversal in one or more subsequent periods.”

“Accounting income (loss) is the net profit or loss for a period, as reported in the statement of profit and loss, before deducting income tax expense or adding income tax saving.”

“Taxable  income  (tax  loss)  is  the  amount  of  the  income  (loss)  for  a  period, determined in accordance with the tax laws, based upon which income tax payable (recoverable) is determined.”

5. From  the  above,  it  is  noted  that  payment  of  MAT,  does  not  by  itself,  result  in  any timing  difference  since  it  does  not  give  rise  to  any  difference  between  the  accounting  income and the taxable income which are arrived at before adjusting the tax expense, namely, MAT. In other words, under AS 22, deferred tax asset and deferred tax liability arise on account of differences  in  the  items  of  income  and  expenses  credited  or  charged  in  the  profit  and  loss account as compared to the items of income that are taxed or items of expense that are allowed as deduction, for the purposes of the Act.   Thus, deferred tax assets and deferred tax liabilities do  not  arise  on  account  of  the  amount  of  the  tax  expense  itself. In  view  of  this,  it  is  not appropriate to consider MAT credit as a deferred tax asset for the purposes of AS 22.
 
Whether MAT credit can be considered as an ‘asset’

6. Although MAT credit is not a deferred tax asset under AS 22 as discussed above, 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 statements.

7. The Framework for the Preparation and Presentation of Financial Statements, issued by the Institute of Chartered Accountants of India, defines the term ‘asset’ as follows:

“An  asset  is  a  resource  controlled  by  the  enterprise  as  a  result  of  past  events from which future economic benefits are expected to flow to the enterprise.”

8. MAT paid in a year in respect of which the 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, MAT credit is an ‘asset’.

9. According to the Framework, once an item meets the definition of the term ‘asset’, it has to meet the criteria for recognition of an asset so that it may be recognised as such in the financial  statements. Paragraph  88  of  the  Framework  provides  the  following  criteria  for recognition of an asset:

“88.  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.”

10. In  order  to  decide  when  it  is  ‘probable’  that  the  future  economic  benefits  associated with the asset will flow to the enterprise, paragraph 84 of the Framework,  inter alia, provides as below:

“84. The concept of probability is used in the recognition criteria to refer to the degree of uncertainty that the future economic benefits associated with the item will flow to or from the enterprise. The concept is in keeping with the uncertainty that characterises the  environment  in  which  an  enterprise  operates. Assessments  of  the  degree  of uncertainty attaching to the flow of future economic benefits are made on the basis of the evidence available when the financial statements are prepared.”

11. The concept of probability as contemplated in paragraph 84 of the Framework relates to both  items  of  assets  and  liabilities  and,  therefore,  the  degree  of  uncertainty  for  recognition  of assets  and  liabilities  may  vary  keeping  in  view  the  consideration  of  ‘prudence’. Accordingly, while for recognition of a liability the degree of uncertainty to be considered ‘probable’ can be
‘more  likely  than  not’  (as  in  paragraph  22  of  Accounting  Standard  (AS)  29,  ‘Provisions, Contingent  Liabilities  and  Contingent  Assets’)  for  recognition  of  an  asset,  in  appropriate
 
conditions, the degree may have to be higher than that.   Thus, for the purpose of consideration of the probability of expected future economic benefits in respect of MAT credit, the fact that a company is paying MAT and not the normal income tax, provides a  prima facie evidence that normal income tax liability may not arise within the specified period to avail MAT credit. In view of this, 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.

12. Where MAT credit is recognised as an asset in accordance with paragraph 11 above, the same should be reviewed at each balance sheet date. A company should write down the carrying amount of the MAT credit asset to the extent there is no longer a convincing evidence to the effect that the company will pay normal income tax during the specified period.

Presentation of MAT credit in the financial statements

Balance Sheet

13. Where a company recognises MAT credit as an asset on the basis of the  considerations specified  in  paragraph  11  above,  the  same  should  be  presented  under  the  head  ‘Loans  and Advances’  since,  there  being  a  convincing  evidence  of  realisation  of  the  asset,  it  is  of  the nature  of  a  pre-paid  tax  which  would  be  adjusted  against  the  normal income tax during the specified period. The asset may be reflected as ‘MAT credit entitlement’.

14. In  the  year  of  set-off  of  credit,  the  amount  of  credit  availed  should  be  shown  as  a deduction  from  the  ‘Provision  for  Taxation’  on  the  liabilities  side  of  the  balance  sheet.  The unavailed amount of MAT credit entitlement , if any, should continue to be presented under the head ‘Loans and Advances’ if it continues to meet the considerations stated in paragraph 11 above.

Profit and Loss Account

15. According to paragraph 6 of Accounting Standards Interpretation (ASI) 6, ‘Accounting for Taxes on Income in the context of Section 115JB of the Income-tax Act, 1961’, issued by the Institute of Chartered Accountants of India, MAT is the current tax. Accordingly, the tax expense arising on account of payment of MAT should be charged at the gross amount, in the normal way, to the profit and loss account in the year of payment of MAT. In the year in which the MAT credit becomes eligible to be recognised as an asset in accordance with the recommendations contained in this Guidance Note, the said asset should be created by way of a credit to the profit and loss account and presented as a separate line item therein.

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