Minimum Alternate Tax

Firms and companies can minimise their tax liabilities using various Income Tax Act provisions. These applicable provisions include depreciation, exemption, deduction, and many more. As a result of these tax incentives and concessions, many firms can show their taxable income as zero. 

 

This has been possible despite making significant profits and paying out dividends subsequently. A new tax provision called the Minimum Alternate Tax (MAT) has been introduced to bring these companies paying nil tax within the scope of the tax bracket. 

 

According to MAT in income tax, your firm has to pay at least a minimum amount as tax to the government. But what exactly is MAT? And how is it calculated? Read on to find out.

The Indian Government, in 1988, launched the concept of MAT to improve the accountability factor. This concept also ensured that no company avoided paying tax to the government.

 

Introduced per the Finance Act 1987, the Minimum Alternate Tax came into force from 1988-89. All zero-tax paying firms must pay the government a specific percentage of their total book profit as taxable income.

 

With the introduction of MAT, several amendments have been made, and currently, the Minimum Alternate Tax is being levied on companies under Section 115JB of the Income Tax Act.

Your company as a taxpayer is liable to pay taxes under the following situations, whichever may deem higher:

1. If your company has computed the tax liability per the usual Income Tax Law provisions

2. If tax has been computed at 15% inclusive of CESS and surcharge as applicable on your firm’s total book profit

 

According to the first provision, you calculate the tax liability by considering the applicable tax rate of your company. However, in the second provision, 15% is applied to the total book profit of your company.

 

Another point to consider is if your company is part of an International Financial Services Centre acquiring its income in foreign exchange, which is convertible, you are levied MAT at a rate of 9% only.

To understand the MAT calculation better, consider a hypothetical example. But first, you must know that MAT comes into play only when your company’s taxable income is less than 15.5% inclusive of the applicable CESS and surcharge.

 

Here is a simplified version of the MAT calculation with an example- 

 

Assume your company has a book profit of ₹100 Crores. In this scenario, you must pay a tax of at least ₹15 Crores, assuming the MAT rate to be 15%.

 

In case your company’s regular tax liability after making all deductions is ₹10 Crores, which is less than the Minimum Alternate Tax. Here, you must pay the government the remaining ₹5 Crores as MAT.

 

Additionally, you can use a credit equal to ₹5 Crores for all your future tax payments. Note that the Indian Government decreased the MAT rate from 18.5% in 2019 to 15%, which is the current applicable rate.

MAT applies only to companies and does not apply to:

• Individuals

• Partnership firms

• Sole proprietorships

• HUFs

Knowing some of the significant features of MAT is crucial and its credit is one among them. 

 

This is the difference between the tax your company pays according to MAT and regular tax. 

 

You can carry forward this credit for a maximum tenor of 15 financial years. You can consider the MAT credit similar to an advance tax. As mentioned, you can utilise this credit to pay your company’s tax in the future.

 

To understand the concept, here’s an example with the calculation for MAT.

 

For instance, assume your company has a tax liability of ₹10 Lakhs, per the standard Income Tax Act provisions. However, according to MAT provisions, the liability amounts to ₹10.5 Lakhs.

 

MAT is higher than the regular tax liability. Hence, your company can avail credit for the same as per Section 115JAA. 

 

Simply put,

 

MAT credit of your company = MAT liability – Regular tax liability

 

₹10,50,000 – ₹10,00,000 = ₹50,000

 

Another critical feature is advance tax payment per Section 115JB of the Income Tax Act. Remember that your company must pay this advance tax according to income tax provisions.

 

While paying MAT is essential, it is equally important to furnish a report in the prescribed format mentioned in Form 29B. Make sure to submit this report when filing your company returns.

 

With the amendment of the law in 2011, MAT applies to all companies operating and earning profits in Speciality Economic Zones.

 

The Government of India has introduced MAT to limit tax exemptions and enable companies to pay a minimum tax. With the MAT credit facility, you can carry forward the excess tax paid and use it for the future.

 

Likewise, there are many other Income Tax provisions introduced by the government that every taxpayer needs to be aware of. You can obtain all additional details regarding tax provisions and other Income Tax amendments on Bajaj Markets.