mat tax credit

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vishal (Querist)
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03 September 2009 how mat tax credit should be reflected in the acounts. moreover when we caclulate the deffered tax asset or liabililty should we take into consideration the mat credit we are entiteled to.

CA CS CIMA Prakash Somani

CA CS CIMA Prakash Somani (Expert)
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03 September 2009 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

vishal

vishal (Querist)
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04 September 2009 thank u but will u please explain me in deep. becasue in many public co reports i see they recognize the mat tax credit as income and shown it in to the asset side of b\s. under the head loans&advances. moreover many c.a firm includes the mat tax credit in the deffered tax asset or liability schedual.

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Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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03 August 2024 **MAT (Minimum Alternate Tax) Credit Accounting and Presentation**

MAT credit is a tax credit that companies can carry forward and set off against their future tax liabilities under normal tax provisions. It arises when a company pays MAT under Section 115JB of the Income Tax Act and is eligible to utilize this credit against future tax liabilities.

### 1. **Recognition of MAT Credit**

#### **In Financial Statements:**

**a. Presentation in Balance Sheet:**

- **MAT Credit as an Asset:** MAT credit should be recognized as a **deferred tax asset** on the balance sheet. This is because MAT credit is essentially a future tax benefit. It should be classified under "Loans and Advances" or "Other Non-Current Assets" in the balance sheet, depending on its expected realization period.

- **Deferred Tax Asset:** Under the accounting standards (such as Ind AS 12 for Indian companies), the MAT credit is not typically shown as income but rather as a deferred tax asset. This asset reflects the benefit of the MAT paid which can be adjusted against future tax liabilities.

**b. Recognition in Profit and Loss Account:**

- **MAT Credit is Not Recognized as Income:** MAT credit is not recognized as income in the profit and loss account. Instead, it is carried forward as a deferred tax asset. The recognition of MAT credit as income is not compliant with accounting standards because it represents a future tax benefit rather than current income.

### 2. **Deferred Tax Asset/Liability and MAT Credit**

When calculating deferred tax assets and liabilities:

- **MAT Credit Consideration:** MAT credit should be considered while calculating deferred tax assets. It affects the calculation of deferred tax assets and liabilities since it represents a future benefit that can offset regular tax liabilities.

- **Deferred Tax Asset Calculation:** The deferred tax asset arising from MAT credit should be recognized based on the probability of future taxable income. This ensures that the credit can be utilized against future tax liabilities.

### **Detailed Explanation:**

**a. Deferred Tax Asset (DTA) Calculation:**

- **Deferred Tax Assets (DTAs)** arise when taxable income is less than the accounting profit, and these assets should be recognized if there is reasonable certainty of future taxable income against which the DTAs can be utilized.

- **MAT Credit** is considered as a part of DTA because it will be used to offset the future tax liability. The MAT credit is carried forward and adjusted against future tax liabilities once the company starts paying regular tax.

**b. Deferred Tax Liability (DTL):**

- **Deferred Tax Liabilities (DTLs)** are recognized when accounting income is higher than taxable income. While calculating DTL, MAT credit does not directly affect the calculation, but it is part of the broader deferred tax considerations.

**Example of Accounting for MAT Credit:**

1. **Payment of MAT:**
- Suppose a company pays MAT of ₹100,000.
- This amount is recorded as MAT Credit in the balance sheet.

**Journal Entry:**
```
Dr. MAT Credit (Deferred Tax Asset) ₹100,000
Cr. Bank ₹100,000
```

2. **Utilization of MAT Credit:**
- When the company offsets the MAT credit against future tax liabilities, the deferred tax asset (MAT Credit) is reduced.

**Journal Entry:**
```
Dr. Tax Expense (Profit and Loss Account) ₹100,000
Cr. MAT Credit (Deferred Tax Asset) ₹100,000
```

3. **Disclosure in Financial Statements:**
- The MAT credit should be disclosed in the balance sheet under "Deferred Tax Assets" or similar headings.
- Ensure clear notes to the accounts explaining the MAT credit and its utilization.

### **Common Misconceptions:**

- **MAT Credit as Income:** Recognizing MAT credit as income is incorrect. MAT credit is not an income but a future tax benefit. It should not be shown as income but as a deferred tax asset.

- **Inclusion in Deferred Tax Schedules:** MAT credit should be included in the deferred tax schedules. It is important to include this credit in calculating the net deferred tax position, ensuring that the credit is utilized against future tax liabilities.

### **Conclusion:**

- MAT credit should be recognized as a deferred tax asset and not as income.
- It should be reflected in the balance sheet under "Deferred Tax Assets."
- When calculating deferred tax assets and liabilities, MAT credit should be taken into account to determine the future tax benefits.
- Ensure compliance with accounting standards and tax regulations while accounting for MAT credit.

If you need further clarification or additional details, feel free to ask!