What is Minimum Alternate Tax or MAT?
Minimum alternate tax was launched to reduce the gap between the tax accountability as per income calculation and book profits. To better understand it, MAT was introduced to target companies that make huge profits and pay the dividends to their shareholders but pay very minimal tax under the normal provisions of the income tax act. They do this by taking advantage of the deductions and exemptions allowed under the act. Therefore, with the introduction of MAT, the companies have to pay a fixed percentage of their profits as minimum alternate tax. Also, it is calculated under section 115JB. Below are the 2 provisions under which the companies should pay higher of the tax calculated:
- Tax liability as per the normal provisions of the income tax act, i.e, tax rate 30% + 4% education cess and surcharge if applicable
- Tax liability explanation as per the MAT provisions is in section 115JB. The tax rate is 15% with effect from AY 2020-21
Calculation of MAT or Minimum Alternate Tax
MAT includes 18.5% of book profits which include surcharge and cess if they are applicable (15% from AY 2020-21). Here, book profit means the net profit as shown in the profit and loss account for the year as increased and decreased by the following:
Additions to the Net Profit if Debited to the Profit & Loss Account
- Income tax paid or payable if any calculated as per normal provisions of the income tax act
- Transfer made to any reserve
- Dividend proposed or payable
- Provision for loss of subsidiary companies
- Depreciation including depreciation on account of revaluation of assets
- Amount/provision of deferred tax
- Provision for unascertained liabilities
- Amount of expense relating to exempt income under sections 10, 11, 12 except section 10AA and 10(38). This means income under section 10AA & long term capital gain are exempt under section 10(38) are subject to MAT.
Deletions to the Net Profit
- Amount withdrawn from any reserves or provisions
- The amount of income to which any of the provisions of section 10, 11 & 12 except 10AA & 10(38) applies.
- The amount is withdrawn from revaluation reserve and credited to profit & loss account to the extent of depreciation on account of revaluation of asset
- Amount of loss brought forward or unabsorbed depreciation, whichever is less as per the books of account. However, the loss shall not include depreciation. (if loss brought forward or unabsorbed depreciation is nil then nothing shall be deducted)
- Amount of Deferred Tax, is any such amount is credited in the profit & loss account
- Amount of depreciation debited to the Profit and Loss Account (excluding the depreciation on revaluation of Assets)
Applicability of MAT
As per section 115JB, every taxpayer being a company is liable to pay MAT, if the Income tax is payable on the total income, computed as per the provisions of the income tax act in respect of any year is less than 15% of its book-profit + surcharge (SC) + health & education cess. However, the provisions of MAT are not applicable on:
- The domestic companies which have opted for tax regimes under Section 115BAA or Section 115BAB;
- Any income accruing or arising to a company from the life insurance business referred to in Section 115B;
- Shipping company, the income of which is subject to tonnage taxation.
[As amended by Finance Act, 2020]. Further, as per Explanation 4 to section 115JB as amended by Finance Act, 2016 with retrospective effect from 1/4/2001, it is clarified that the MAT provisions shall not be applicable and shall be deemed never to have been applicable to an assessee, being a foreign company, if:
- The assessee is a resident of a country or a specified territory with which India has an agreement referred to in sub-section (1) of section 90 of the Central Government has adopted an agreement under subsection (1) of section 90A and the assessee does not have a permanent establishment in India in accordance with the provisions of such agreement or,
- The assessee is a resident of a country with which India does not have an agreement of nature referred to in clause (i) and the assessee is not required to seek registration under any law for the time being in force relating to companies.
Further, as per Explanation 4A to section 115JB as inserted by Finance Act, 2018, MAT provisions shall not be applicable to a foreign company, whose total income comprises profits and gains arising from a business referred to in section 44AB, 44BB, 44BBA, or 44BBB and such
income has been offered to tax at the rates specified in those sections
What is Minimum Alternate Tax Credit?
When any amount of tax is paid as minimum alternate tax by the company, it can claim the credit of such taxes paid in accordance with the provision of section 115JAA.
The allowable tax credit is the tax paid as per MAT calculation which is the income tax payable under the normal provision of the income tax act. However, no interest shall be paid on this tax credit by the department.
When is MAT applicable?
It is applicable to all the companies including foreign companies.
What is the difference between MAT and Alternate Minimum Tax or AMT?
MAT stands for Minimum Alternate Tax and AMT stands for Alternate Minimum Tax. Initially the concept of MAT was introduced for companies and progressively it has been made applicable to all other taxpayers in the form of AMT.