The Indian Government, in 1988, launched the concept of Minimum Alternate Tax (MAT) to ensure that no company avoided paying tax to the government. All zero-tax paying firms must pay the government a specific percentage of their total book profit as taxable income. 

 

Firms and companies can minimise their tax liabilities using various Income Tax Act provisions. As a result of these tax incentives and concessions, many firms can show their taxable income as zero. With the introduction of MAT, several amendments have been made, and currently, it is being levied on companies under Section 115JB.

What are the Basic Provisions of MAT?

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

1. Tax calculations according to the normal provisions of the Income Tax Act

According to the regular provisions, companies need to pay a tax rate of 30% plus 4% education cess plus surcharge (if applicable). For domestic companies whose turnover receipts touch the mark of ₹400 Crores, the tax liabilities are 25% plus 4% cess plus surcharge (if applicable).

2. Tax calculations according to the MAT provisions u/s 115JB 

The taxation rate is 15% of book profits plus 4% education cess plus a surcharge (if applicable) with effect from 2020-21. Before FY 2019-20, the taxation rate for MAT was 18.5%.

 

Additionally, if your company is part of an International Financial Services Centre, earning its income in foreign exchange, which is convertible, 9% MAT is levied.

How to Calculate Minimum Alternate Tax

The company needs to calculate the taxation liability according to normal provisions under the Income Tax Act. Then, they need to compare it with the tax computed at 15% (plus surcharge and cess, if applicable) on the book profit. The company needs to pay the highest liability after the comparison.

 

To understand MAT calculation better, consider a hypothetical example. Suppose the book profit of your company is ₹100 Crores. In this case, you need to pay at least ₹15 Crores as tax, according to the MAT rate, which is 15%. 

 

If the regular tax liability is ₹10 Crores after deductions, which is less than the MAT rate of 15%, you need to pay ₹5 Crores as MAT to the government.

What is Book Profit and its Calculation under MAT?

Book profit refers to the net profit a company earns for a particular year according to the profit and loss account. It is calculated according to the Companies Act, 2013, guidelines. There are two types of adjustments, positive adjustments and negative adjustments, on which the book profit depends.

 

Here are a few positive adjustments:

  • Income tax paid or payable as per normal provisions of the Income Tax Act

  • Transfer made to reserves

  • Dividend proposed or paid

  • Provision for loss of subsidiary companies

  • Provision for deferred tax

  • Provision for unascertained liabilities

  • Depreciation on account of revaluation of assets

 

Here are some negative adjustments:

  • Amount withdrawn from provisions or reserves

  • Income amount to which provisions of sections 10, 11, and 12 apply, except sections 10AA and 10(38)

  • Amount debited from revaluation reserve and credited to P/L account to the extent of depreciation due to asset revaluation

  • Depreciation amount debited from the P/L account, except depreciation on asset revaluation

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Who is Eligible to Pay the Minimum Alternate Tax?

Here are the institutions that need to pay MAT:

  • Indian companies

  • Foreign companies

 

MAT does not apply to the following entities:

  • Individuals

  • Hindu Undivided Families (HUFs)

  • Partnership firms

  • Sole proprietorships

What are the Essential Features of the Minimum Alternate Tax?

A significant feature of this provision is MAT credit. When a company pays the MAT, it can claim the MAT credit of the paid tax as per the provisions under Section 115JAA. 

 

Here are some key points about MAT credit:

  • Companies can carry forward the MAT credit for 15 assessment years

  • Companies can utilise this credit for the payment of future tax liabilities

  • Companies do not get any interest on MAT credit

  • It is the difference between the MAT amount that a company pays and the amount that is payable  

Which companies are liable to pay MAT?

All private or public companies, whether they are Indian or foreign, need to pay the MAT. However, here are some exceptions:

  • Income that a company receives from the life insurance business 

  • Shipping income since it is liable to tonnage taxation u/s 115V to 115VZC

  • Companies from a country or territory with which the Indian Government has an agreement u/s 90(1)

  • Companies that do not have a permanent establishment in the country as agreed to the Central Government u/s 90A(1) 

  • Foreign companies whose total income is from profits and gains from businesses that are referred to in sections 44AB, 44BB, 44BBA, or 44BBB

Applicability & Non-Applicability of MAT

If a company hides their income, they will be penalised. Prior to the introduction of MAT, it did not apply to companies earning profit in Special Economic Zones (SEZs). Later, in 2011, after the laws were amended, it included companies operating in SEZs. 

 

Every company needs to submit a report from a certified CA stating that the company has calculated the book profits according to the provisions of Section 115JB.

Future of Minimum Alternate Tax in India

The government is receiving various suggestions to amend Section 115JB and offer more flexibility and inclusivity. The government has recently announced a special committee to resolve disputes regarding MAT payments. 

 

Currently, the committee's scope is focused on resolving MAT demands requested by foreign institutional investors. This is because several foreign investors have received notices about MAT payments in the last few months. However, the government is continuously working to control and manage MAT payments in a better manner.

FAQs on Minimum Alternate Tax

15% of your company’s total book profit is calculated as MAT, according to Section 115JB of the Income Tax Act.

 

The below type of companies with total tax liability of below 15% of the total book profit, including cess and surcharge need to pay MAT: 

  • Indian companies

  • Foreign companies

According to MAT, book profit simply means the net profit your company makes, as shown in its P&L statement for a particular financial year.

 

Yes, if your company is paying the Minimum Alternate Tax (MAT), you must complete the report as explained in Form 29B.

 

You can carry forward the MAT credit for a maximum tenor of 15 assessment years.

 

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