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MAT Credit Utilization and MAT Credit Accounting Treatment


MAT Credit

Minimum Alternate Tax (MAT) is required to be paid if the normal tax liability of the company is lower than 15% of the book profit calculated as per MAT Provision.


If in any year the company pays liability as per MAT, then it is entitled to claim credit of MAT paid over and above the normal tax liability in the subsequent year(s). The provisions relating to carry forward and adjustment of MAT credit are given in section 115JAA


To read in detail about MAT Applicability and how to calculate book profit please read here


Example of MAT Credit :

The tax liability of Systems Ltd. for the year 2023-24 under the normal provisions of the Income-tax Act is Rs. 2,00,000 and the liability as per the provisions of MAT is Rs. 8,00,000.


A company paying MAT is entitled to claim the credit of MAT paid in excess of normal tax liability. In this case the liability of Systems Ltd. for the year 2023-24 under the normal provisions is Rs. 2,00,000 and as per the provisions of section 115JB it is Rs. 8,00,000 and hence, the company has to pay Rs. 8,00,000, i.e., liability as per MAT provisions. As per section 115JAA, if in any year a company pays its tax liability as per MAT, then it can claim MAT credit being the excess MAT paid over the normal tax liability. In this case the company will be entitled to claim MAT credit of Rs. 6,00,000


Utilisation of MAT Credit


The credit of MAT can be utilised by the company in the subsequent year(s). Credit can be carried forward for sett for 15 years and thereafter it will lapse.


In Which Years MAT Credit Can Be Utlised: The credit can be adjusted in the year in which the liability of the company as per the normal provisions is more than the MAT liability. The set off in respect of brought forward MAT credit shall be allowed in the subsequent year(s) to the extent of the difference between the tax on its total income as per the normal provisions and as per the MAT provisions.


Example of Utilisation of MAT Credit

Taking the above example of available MAT Credit of Rs 6 Lakhs. In a subsequent year in FY 2024-25 liability as per normal provision is Rs 6 Lakhs and liability as per MAT is Rs 4 Lakhs. Then out of the total available credit of Rs 6 Lakh, MAT Credit can be utilised for Rs 2 Lakhs (i.e. Rs 6 Lakh Income Tax Liability Less Rs. 4 Lakh MAT Liability for Year 2024-25).


Balance MAT Credit remaining of Rs 4 Lakhs will be carried forward to be set off in subsequent years.


Thus MAT Credit can be logically utilised only in the year when normal tax liability is more than the MAT Tax Liability.


Re-computation of Book Profits of Past Years due to Advance Pricing Agreement or Secondary Adjustment


In case of an increase in normal tax liability due to Secondary Adjustment under Transfer Pricing Regulations or Advance Pricing agreement then the taxpayer can make an application to the assessing officer for re-computation of the MAT Credit Utilisation.


Normally increase in normal tax liability will allow taxpayers to utilise the MAT Credit. However such excess credit availment will be allowed only if the taxpayer has not utilised the MAT Credit in subsequent years.


Accounting Treatment of MAT Credit


Lets take example of Year 1:

Normal Tax Liability = Rs 10,000

MAT Tax Liability = Rs 14,000

Thus , there will be a MAT Credit of Rs 4,000 to be c/f but total tax payment will be of Rs 14,000


So Accounting treatment in Year 1 will be as follows :

Income Tax Expense = Rs 10,000

To Provision for Income Tax = Rs 10,000


MAT Credit Entitlement (Asset) = Rs. 4,000

To Provision for Income Tax = Rs 4,000


Provision for Income Tax = Rs 14,000

To Bank Account = Rs 14,000


In Year 2,

Normal Tax Liability = Rs 20,000

MAT Tax Liability = Rs 12,000

Thus , Utilise the available credit of Rs 4,000 here


So accounting treatment in year 2 will be as follows,

Income Tax Expense = Rs 20,000

To Provision for Income Tax = Rs 20,000


Provision for Income Tax = Rs 20,000

To MAT Credit Entitlement = Rs 4000

To Bank Account = Rs 16,0000


Deferred Tax Asset on MAT Credit

MAT does not create any difference between accounting income and taxable income since it is computed after computation of accounting income & taxable income. Therefore, it is not prudent to consider MAT credit as a deferred tax asset.


 

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