[Opinion] Accounting of Minimum Alternate Tax in the Books of Account

As per section 115JB companies are required to pay higher tax calculated under the following two provisions

1- Tax liability as per normal provision of the Income Tax Act
2- Tax liability as per section 115JB (Minimum Alternative Tax) of the Income Tax Act

MAT Credit – Where the amount of tax paid as per MAT, the credit to the extent of difference between tax liability as per MAT and tax liability as per normal provision of the Act is available to the assessee in accordance with the provision of section 115JAA.

For example

1. Tax liability as per MAT provision INR 100
2. Tax liability as per normal provision of Income Tax Act INR 70
3. Mat credit INR 30

MAT credit can be carried forward for fifteen assessment years and can be utilised in the year tax liability as per normal provision of Income Tax Act is higher than tax liability as per MAT, to the extent of difference between tax liability as per normal provision of the Act and tax liability as per MAT (which means companies in anyway has to pay the tax equal to MAT)

For example

1. MAT credit available: INR 30
2. Tax liability as per normal provision of the Act: INR 150
3. Tax liability as per MAT: INR 130
4. MAT credit utilisation: INR 20

Accounting – Companies should always record tax provision equal to tax liability as per normal provision of the Act, even if tax liability as per the MAT higher

For example

1. Tax liability as per MAT: INR 100
2. Tax liability as per normal provision of the Act: INR 70
3. MAT credit: INR 30
4. Tax payment: INR 100

Journal Entries

1. For creating the provision for Income Tax
   Tax Expense (P&L): Dr 70
   To Provision for Income Tax: 70
2. For making the payment of tax
   Advance Tax A/c: Dr 100
   To Bank: 100
3. For recognition of MAT credit
   MAT Credit Entitlement: Dr 30
   To Advance Tax: 30

When companies record tax provisions as per normal tax liability, they indirectly record the MAT credit also by making payment of tax amount equal to the amount of MAT liability. Though the MAT credit is not separately recognized, the same appears in the advance tax payment account (asset) because the tax payment is done at an amount equal to the MAT liability. Therefore, after net off of provision with advance tax the balance left in advance tax equal to MAT credit

Recognizing tax provisions equal to MAT liability may not be correct, as an excess of MAT liability over normal tax liability is a tax credit, it is like pre-paid taxes, and deposit with the Government. Recording the tax liability equal to normal tax liability will match the books with Income Tax Return not only tax liability but also MAT credit

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