The Hindu Business Line : MAT credit disclosure

Book profits tax has been a controversial issue ever since it was brought into the Income-Tax Act, 1961 (the Act) in 1987. Today, industry seems reconciled to the tax. Most of the complications arising on account of the gap between book income and tax income have been sorted out by the introduction of AS 22, namely Accounting for Deferred Taxes, effective 2001.

The long-awaited plea of the industry for facilitating a credit for MAT tax paid in the succeeding years was accepted in 2005 and from assessment year 2007-08 credit can be set-off over seven succeeding years against normal tax liability. Therefore, viewed from the cash flow perspective MAT tax paid can be recouped and there is no permanent loss. The Institute of Chartered Accountants of India (ICAI) has brought out a guidance note on the accounting for MAT credit in the books of accounts.

Features of MAT credit

The salient features of MAT credit under Section 115JAA as applicable in respect of tax paid under Sections 115JA and 115JB are:

A company, which has paid MAT would be allowed credit in respect hereof.

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.

No interest is allowable on such credit.

The MAT credit so determined can be carried forward for set-off up to seven succeeding assessment years (hereinafter referred to as the `specified period').

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.

The amount 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.

MAT as deferred tax asset

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 ICAI. MAT is a tax liability and is the result of the operating performance of the organisation. A deferred tax asset arises on account of timing differences between taxable income and accounting income It is to be 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. Accordingly, the guidance note has opined that MAT credit does not constitute deferred tax asset.

MAT as asset

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. MAT paid by the company is an asset controlled by it and which also represents future economic benefits. The benefit is derived by the right to set- off MAT against the normal tax liability of the future. The guidance note also recommends the application of probability test to measure the certainty of future economic benefit. In the balance sheet MAT credit is to feature as "Loans and Advances" in item B 10 in Part I schedule VI of the Companies Act. The nature of the asset is "MAT credit entitlement" since it is in the nature of prepaid tax. 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 should continue to appear as Loans and Advances.

Note provides clarity

A guidance note is always welcomed since it provides the required clarity on disclosure features on MAT credit. The substantive features of MAT have to be understood in conjunction with the accounting standard of deferred tax and the disclosure elements are also important since deferred tax asset and MAT credit have to be disclosed separately. This will undoubtedly provide the necessary information to the users of financial statements on the quantum of deferred tax asset and MAT credit available for set-off from the balance itself.

(The author is a Chennai-based chartered accountant.)

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