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Saturday, May 06, 2006

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Timely guidance on MAT

Mohan R. Lavi

Providing clarification

Minimum Alternate Tax (MAT) was introduced in India in the mid-1990s. Many companies with book profits were escaping the tax net by intelligent use of depreciation and other measures which MAT nipped in the bud by proposing a 7.5 per cent (proposed to be raised to 10 per cent in the latest Finance Bill) cap. However, with a view to encouraging payment of MAT, Section 115JAA was introduced into the Income-Tax Act with effect from 1997 permitting companies to set off MAT credit over five succeeding years (proposed to be raised to seven years in the Finance Bill, 2006). Accounting for MAT credit has always been a ticklish issue which has been further compounded with the issuance of AS-22 on Deferred Taxes by the Institute of Chartered Accountants of India (ICAI). A Guidance Note on treatment of MAT credit has been issued by the ICAI at a most appropriate time which attempts to clarify many of the issues related to MAT.

Timing difference?

Responding to the questions whether payment of MAT and getting credit will result in a timing difference, the Guidance Note observes 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 and the taxable incomes which are arrived at before adjusting the tax expense, namely, MAT.

Under AS 22, deferred tax asset and deferred tax liability arise on account of differences in the items of income and expenses credited or charged in the P&L account as compared to the items of income that are taxed or items of expense that are allowed as deduction, for the purposes of the Act. Thus, deferred tax assets and deferred tax liabilities do not arise on account of the amount of the tax expense itself. In view of this, it is not appropriate to consider MAT credit as a deferred tax asset for the purposes of AS 22. However, since there is no specific mentioned about non-recognition of MAT as a timing difference in AS 22, it would be in the fitness of things for the ICAI to issue an interpretation on AS 22 mentioning the same since it has been repeatedly clarified that the a Standard would prevail over a Guidance Note.


Although MAT credit is not a deferred tax asset under AS 22, yet it gives rise to expected future economic benefit in the form of adjustment of future income tax liability arising within the specified period. A question, therefore, arises whether the MAT credit can be considered as an `asset' and if so whether it should be so recognised in the financial statements.

MAT paid in a year in respect of which the credit is allowed during the specified period under the Act is a resource controlled by the company as a result of a past event, namely, the payment of MAT. MAT credit has expected future economic benefits in the form of its adjustment against the discharge of the normal tax liability if the same arises during the specified period. Accordingly, MAT credit is an `asset.' The Guidance Note suggests that the MAT credit should be shown under `Loans and Advances.' According to Paragraph 6 of Accounting Standards Interpretation (ASI) 6, `Accounting for Taxes on Income in the context of Section 115JB of the I-T Act', issued by the ICAI, MAT is the current tax. Accordingly, the tax expense arising on account of payment of MAT should be charged at the gross amount, in the normal way, to the profit and loss account in the year of payment of MAT.

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

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