Accounting treatment of MAT

Accounts and Cricket are similar. Both have bouncers. Accounting entry for Minimum Alternate Tax is one such bouncer. Popularly known as MAT.

Let us try to simplify the accounting treatment for MAT.

Firstly, we should know the situation when MAT arises.

According to Income Tax Act, 1961 the tax liability of the company is

Tax as per Normal Provisions is the tax as computed as per the provisions stated in Sec 28 to Sec 45 of the Income Tax Act.

Tax as per MAT Provisions is the tax as computed under Sec 115JB of the Income Tax Act.

Now let us see the accounting entries  :

1. When the Tax payable as per MAT Provisions is higher:

Say, Tax payable as per MAT Provisions                 = 100
Tax payable as per Normal Provisions                     =   80

This means the company has to pay Tax as per MAT Provisions since it is higher, this means the company has to pay Rs.100/-.

The entry to be passed on 31st March is:

MAT Expenses (Indirect Expenses)      Dr                                                        100
                                                To     MAT Payable (Short Term Provisions)               100

The above entry is just a normal provision for the direct taxes payable, in this case in the form of MAT. But payment of MAT would give the company a benefit.

Since the Company is liable to pay MAT, the company can avail the difference of the tax payable as per MAT and tax payable as per Normal Provisions as MAT Credit. For More information on MAT Credit, refer to this article.
In the above case, MAT credit = Rs. 100 (Tax as per MAT) - Rs 80 (Tax as per Normal Provisions)
i.e. MAT Credit is Rs 20/-.

Accounting for this credit would be made if the Company is expecting to utilize this credit before it lapses in the future.  This is due to the fact that paragraph 88 of the Framework for presentation and presentation of financial statements states "An Asset is recognized in the balance sheet when it is probable that future economic benefits associated with it  will flow to the enterprise and the asset has a cost or value  that can be measured reliably".  Keeping this in view, if the company is considering it is probable for itself to be able to utilize the credit in the future before it lapses, it should recognize the MAT credit as an Asset in its books. For more information on utilization of MAT credit click here.

For this MAT Credit, on 31st March the following entry is to be passed:

MAT Credit Entitlement (Loans and Advances)  Dr                                               20
                                                                To  MAT Expenses (Indirect Expenses)              20

Summarizing, the above situation,

The expenses debited to Profit and Loss will be Rs 80/- (Balance in MAT Expenses a/c)
Short Term Provisions shows MAT Payable of Rs 100/-
Loans and Advances shows MAT Credit amounting to Rs. 20/-

It is also to be carefully seen that any MAT Credit previously recognized is to be further maintained or not. This depends on whether the company believes whether or not it will be able to pay normal tax and utilize the credit before it expires. For accounting entries relating to reversal and utilization of MAT Credit click here.

2. When the Tax payable as per Income Tax provisions is higher:

In this case MAT doesn't arise and hence accounting treatment is similar to the entry to be passed for provision for Tax. - Refer my article on the Accounting Entry for Provision for Income Tax.

Disclosure with respect to MAT:

MAT Credit is shown as a deduction for the tax expenses in the year in which MAT Credit is recognized.

The Statement of Profit and Loss will look like this:

Revenue                                     - XXX
Less: Expenses                          -  (XX)
Profit before Tax (PBT)(I)        -    XX

Less : Tax expense
1.Current Tax (a)                         - XXX
   Less: MAT Credit (b)               -   (XX)
2. Deferred Tax (c)                      -   XXX
Total Tax Expenses(II=a-b+c)     -     XX

Profit After Tax (I - II)                -     XX

Feel free to comment in case of any queries.