Income Tax Taxation

Minimum Alternate Tax (MAT) – A Complete Overview

What is Minimum Alternate Tax (MAT)?

Minimum Alternate Tax (MAT) is a provision introduced in indirect tax laws to limit various tax concessions and other incentives such as , allowances and tax exemptions, etc which were being used by many companies to avoid tax payment. MAT was first introduced in India in 1983 under the regular provisions of the Income Tax Act, 1961. India still retains MAT in its direct tax law. Now after the introduction of MAT in India, the Companies have to pay a fixed percentage of their profits as Minimum Alternate Tax. MAT is applicable to all companies including the foreign companies as well. MAT is calculated under Section 115JB of the Income Tax Act.

Background of MAT

Minimum Alternate Tax was introduced in India under Section 80VVA of the Income Tax Act through the Finance Act of 1983. Introduction of Section 80VVA placed a restriction on certain deduction in the case of Companies and placed a ceiling on allowance and companies to pay a minimum tax on at least 30% of their profits.

Later in the year 1987, Section 80VVA was removed by the Finance Act, 1987 and introduced Section 115J in a modified manner. According to Section 115J, the assessing authority had to calculate the income of the company. Apart from this the book of profit also had to be determined. In case the income of the assessee company was less than 30% of its book profit, the total income chargeable to tax would be 30% of the book profit.

Further, the year 1996 the MAT provisions were renewed by the Finance Act of 1996, followed by the Finance Act of the year 2000, which replaced Section 115JA with Section 115JB. An amendment was made in Section 115JB by the Finance Act of 2015.  According to this amendment, the tax payable on the company’s total income is less than 18.5% of its book profit. Therefore, the tax payable for such company shall be 18.5% of its book profit. For the Financial Year 2020-21, the tax rate is 15% on book profit with cess and surcharge as add ons.

Companies Liable to Pay Minimum Alternate Tax

All the companies be it private, public, Indian or Foreign are liable to pay MAT if the income tax payable is less than 15% of the book profit with cess and surcharges.

However, MAT will not be applicable to a foreign company if the company is from a specific country with which India has an agreement as per Section 90 (1). Moreover, the foreign companies whose total gains and profits arise from businesses referred to in sections 44AB, 44BB, 44BBA or 44BBB of the income Tax Act.

Calculation of Minimum Alternate Tax

MAT for a company is 18.5% (15% for the FY 2020-21) of its Book profits along with cess and surcharge as applicable. It is calculated as per Section 115JB of the Income Tax Act, 1961.

Let us understand the Calculation of MAT with an example:

The taxable income of a company X which is not availing any tax exemptions or incentives according to the provisions of Income Tax Act, 1961 is Rs. 10 lakhs.

Therefore, the normal tax liability of this company at the rate of 22% corporate tax will be Rs. 2.2 lakhs along with the cess and surcharge.

On the other hand as per provisions made in Section 155JB the book profit of this company is Rs 20 lakhs. Therefore, MAT at the rate of 15% of book profit will be 3 lakhs along with cess and surcharge.

MAT is higher than the normal tax liability, therefore the company will have to pay 3 lakh rupees along with cess and surcharge.

How to Calculate Book Profit?

Book profit is the net profit as given in the profit and loss account for the year increased and decreased by the following items:

Additions to Book Profit

Following additions are applicable if they are debited to the statement of profit and loss:

• Income Tax paid or payable if any which is calculated as per normal provisions of the income tax act.
• The Dividend proposed or paid.
• Provision for loss of subsidiary companies.
• Depreciation including the depreciation on account of revaluation of assets.
• The income of an individual that is derived from the association of Persons (AOP) or body of individuals (BOI) on which no income tax is payable.
• Expenditures are related to incomes that are exempted under sections 10, 11 and 12. However, excluding those under Section 10(38)

Deductions to Book Profit

Following deductions are relevant if they are credited to the statement of profit and loss:

• The amount that is withdrawn from any reserves or provisions.
• The amount of income to which provision of section 10, 11 and 12 except 10AA and 10(38) applies
• An amount of depreciation debited to statement of profit and loss, excluding the depreciation on revaluation of assets.
• The income of an individual that is derived from the association of persons (AOP) or body of individuals (BOI) on which no income tax is payable.

Important Note: The book profit needs to be certified by a Chartered Accountant in Form no. 29B. The report of the certificate should be obtained before the last date of ITR filing to avoid penalties.

What is MAT Credit?

MAT credit is the difference between the MAT and normal tax liability This difference occurs when MAT for a company is more than its normal tax liability.

Carry Forward For MAT Credit

The credit of MAT can be claimed in the year in which normal tax liability is greater than the MAT liability. The maximum amount of MAT credit cannot be more than the difference between the normal tax liability and MAT liability.

Note:MAT credit can be carried up to 15 assessment years from the year MAT credit was generated.

Conclusion

Minimum Alternate Tax was launched by the government to target those companies which were making huge profits by taking advantage of various deductions and exemptions under the Income Tax Act. The introduction of MAT has made these companies pay a fixed percentage of their profit as Minimum Alternate Tax.