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MAT or Minimum Alternative Tax limits tax exemptions for companies. There have been times when companies tried to reduce their tax liability using multiple exemptions of the Income Tax Act. A lot of companies have managed to show zero taxable income as well. Hence, the Indian government came up with the concept of MAT to ensure companies do not avoid taxes.
MAT makes it mandatory for companies to pay a minimum amount of tax to the government. MAT in tax is governed under Section 115JB, and it states that all companies must pay corporate tax as per either of the following concepts (whichever is higher):
According to this concept, you calculate the tax liability using the usual provisions of the Income Tax Act. You apply the appropriate tax rate to the taxable income. The new tax rate for companies that do not seek any exemptions is 22% plus cess and surcharge, whereas, for companies seeking exemptions, the tax rate is 30%.
Companies opting for MAT have to pay 15% on book profit as tax along with applicable cess and surcharge.
All companies, private or public, Indian or foreign, are liable to pay MAT if the payable tax is less than 15% of the book profit plus cess and surcharge.
MAT is not applicable on income received from a life insurance business and shipping income liable for tonnage taxation.
Note: According to the amendments made in the Finance Act, 2016, foreign companies are not eligible for MAT if:
The company is from a country or territory where the Indian government has signed an agreement under Section 90(1) or the company does not have a permanent establishment in the country as agreed to the central government under Section 90A(1)
The company does not have the agreement mentioned above and is not required to register under any law for the time being
The provisions of MAT are not applicable for foreign companies whose total income comprises profits incurred from businesses mentioned in Sections 44AB, 44BB, 44BBA, or 44BBB of the Income Tax Act
Let us explore the features of income tax MAT.
According to the Income Tax Act, if the tax liability is over ₹10,000, the assessee must pay taxes in advance. Similarly, according to Section 115JB, every company is liable to pay tax in advance.
Companies eligible to pay MAT must furnish a MAT report while filing the ROI.
When the government initially introduced the concept of MAT, it was not applicable for companies that operated in Special Economic Zones (SEZs). However, the law was amended in 2011 and included all companies belonging to SEZs for MAT payment.
MAT is equal to 15% of the book profit (plus cess and SC).
Let's understand this with an example:
Star Enterprise is a private company that isn't seeking tax exemptions provided under the Income Tax Act. Their taxable income is ₹15,00,000, and as per the normal tax liability concept, the tax rate is 22%. Thus, the tax payable is ₹3,30,000 plus cess and surcharge.
The book profit of the company as per Section 115JB is ₹30,00,000. Hence, as per Minimum Alternative Tax, the 15% of book profit will be ₹4,50,000 plus cess and surcharge.
Star Enterprise is liable to pay ₹4,50,000 since MAT is higher than normal tax liability.
As mentioned above, a company must pay tax as per normal tax liability or MAT, whichever is higher. When MAT is greater, the difference between MAT and the normal tax liability is called MAT credit.
When you have to pay MAT since it is higher, it is an excess payment of tax. Hence, it can be carried forward and set off against future instances where the normal tax liability is higher. As you can carry forward your MAT credit, it is like an asset.
Note: MAT credit can be carried forward for a period of 15 assessment years.
Let us understand this with an example:
For AY 2017-2018, the normal tax liability was ₹9,00,000. On the other hand, the tax liability under Section 115JB was ₹10,00,000. As MAT was higher than the tax on total income, the company was eligible for MAT credit.
MAT credit = MAT - Normal Tax Liability
= 10,00,000 - 9,00,000
For AY 2020-2021, the normal tax liability for the same company is ₹8,00,000, and MAT was ₹7,00,000. However, the tax payable will be ₹7,00,000.
MAT is calculated as 15% of the book profit.
The MAT rate for AY 2020-2021 is 15%.
MAT is applicable for all companies including foreign companies.
Yes, you can carry forward your MAT credit and set it off against future taxes on total income.
Yes, MAT is applicable for companies operating in Special Economic Zones (SEZs).