Accounting Treatment for MAT Credit

•  The Council of Institute of Chartered Accountants of India has issued a ‘Guidance Note on Accounting for Credit Available In Respect of Minimum Alternative Tax (MAT) under the Income Tax Act, 1961’.

Accounting Treatment:

The Guidance Note on Accounting for MAT credit suggests the following:

MAT credit is not a Deferred Tax Asset – As per AS – 22 on Accounting for Taxes on Income issued by ICAI, deferred tax liability or deferred tax asset arises on account of timing differences (i.e. 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). Further, MAT credit does not give rise to any timing difference. It is simply a current tax. Hence, MAT is not a deferred tax asset.

MAT credit is an Asset – An asset is a resource that is controlled by the enterprise as a result of past events from which future economic benefits are expected to flow to the enterprise. Now, the following questions arise as to whether MAT credit:

• is a resource that is controlled by the enterprise as a result of past events – Yes, it is a resource controlled by the enterprise as a result of payment of MAT in past.
• give rise to future economic benefits that are expected to flow to the enterprise –Yes, it give rise to future economic benefits. The future benefit is in the form of adjustment that can be made while discharging the normal tax liability.

Recognition of MAT credit in Financial Statements – Since MAT credit is an asset, it can be recognised in the financial statements if the following conditions are fulfilled:

• It is probable that the future economic benefits will flow to the enterprise; and
• Its value can be measured reliably.

The probability (i.e. more likely than not) is assessed on the basis of concept of prudence and on the basis of evidence available while preparing the financial statements. Thus, MAT credit should be recognised as an asset in the financial statements only to the extent of convincing evidence available that the company will be paying tax as per normal provisions during the period for which MAT credit can be carried forward