The Income Tax Act has ensured that every taxpayer is fairly taxed. It introduced concepts like indexation for a better tax structure and other concepts to build a substantial taxpayer base. One such rule or concept is the MAT in income tax. What is it, and how does it affect the taxation for a company? Let’s understand. 

What is MAT in Income Tax?

Minimum Alternate Tax (MAT) is a provision under direct tax laws aimed at ensuring companies that benefit from various tax exemptions still pay a minimum amount of tax to the government. 

Sometimes, companies generate significant income but reduce their tax liability using exemptions, deductions, depreciation, and similar provisions under Income-tax Law. In some cases, they pay no tax at all. To address the rise in such "zero-tax companies," MAT in income tax was introduced by the Finance Act 1987, effective from the assessment year 1988-89. However, it was withdrawn in 1990 and reintroduced by the Finance (No. 2) Act, 1996, starting from 1st April 1997.

MAT full form in tax is Minimum Alternate Tax (India). The purpose of MAT is to ensure that companies earning substantial book profits and paying generous dividends contribute to the tax system. Over time, various changes have been made to MAT provisions. Currently, MAT applies to both Indian and foreign companies, ensuring they pay a minimum level of tax despite benefiting from tax incentives and concessions.

What Does The MAT Rule Say?

MAT in income tax falls under Section 115JB of the Income Tax Act, 1961. The section states that when a company calculates its tax liability, it must consider the higher of the following two amounts as the final tax payable:

1. Normal tax liability: This is calculated based on the taxable income of the company, using the standard tax rate applicable to it.
2. MAT: This is 15% of the company’s book profit, with surcharge and cess added as applicable. The book profit is calculated as per specified guidelines.

For companies operating as units of an International Financial Services Centre (IFSC) and earning only in convertible foreign exchange, the MAT rate is lower. It is charged at 9% (plus surcharge and cess).

Applicability of Minimum Alternate Tax:

When MAT was first introduced, companies operating in Special Economic Zones (SEZs) were exempt. However, in 2011, the rules changed, and MAT was extended to include all such companies. Now, every company needs to provide a report from a certified chartered accountant confirming that book profits are calculated according to Section 115JB.

That said, some exceptions exist. The provisions of Section 115JB do not apply to:

• Domestic companies opting for tax regimes under Section 115BAA (tax rate 22%) or Section 115BAB.
• Income earned by companies from the life insurance business under Section 115B.
• Shipping companies whose income is taxed based on tonnage.

Features Of MAT In Income Tax:

• Based on Book Profits: MAT is calculated on book profits, not taxable income. Book profits are the net profits shown in the profit and loss account, adjusted as per Section 115JB of the Income Tax Act.
• MAT Rate: The rate for MAT is 15% of book profits, plus surcharge and cess. This rate can change with government updates.
• MAT Credit: If MAT exceeds regular tax, companies can claim MAT credit and carry it forward for up to 15 years. This credit can offset future tax liabilities.
• Mandatory for All: MAT applies to all companies, including foreign entities with income in India. However, certain incomes, like those from life insurance, are exempt.
• Tax Planning Impact: MAT influences tax planning. Companies must assess its implications and adjust their strategies to stay compliant while minimizing taxes.
• Reporting Requirement: A Chartered Accountant’s report is mandatory to certify book profits and MAT computation. This ensures accuracy and compliance.
• Exemptions and Adjustments: Some incomes are excluded from book profits- reserves, life insurance revenue, and dividends from foreign subsidiaries.
• Investment Incentives: MAT includes certain deductions to encourage investments in priority sectors and projects.

Computation Of MAT In Income Tax:

MAT calculation is dependent on the calculation of the company’s book profit. Under section 115JB(2), “book profit” refers to a company’s net profit shown in its profit and loss account, adjusted by adding or deducting specific items. Those are-

Additions:

Certain expenses debited to the profit and loss account but not allowed under the Income Tax Act are added back:

• Income tax paid or payable as per normal tax provisions.
• Amounts transferred to reserves.
• Proposed or paid dividends.
• Provision for subsidiary company losses.
• Depreciation, including that on revalued assets.
• Deferred tax provisions.
• Provisions for unascertained liabilities like bad debts.
• Expenses linked to exempt income under sections 10, 11, and 12 (excluding section 10AA and 10(38)).
• Asset depreciation.

Some credits to the profit and loss account are tax-exempt and deducted to arrive at book profit. List includes-

• Withdrawals from reserves or provisions.
• Income exempt under sections 10, 11, and 12 (excluding section 10AA and 10(38)).
• Revaluation reserve amounts credited to profit and loss, limited to depreciation on revalued assets.
• The lower of brought-forward losses or unabsorbed depreciation from the books (excluding depreciation if there’s no brought-forward loss or depreciation).
• Deferred tax amounts credited to the profit and loss account.
• Depreciation debited to the account, excluding that on revalued assets.

Once the book profit is calculated, the 15% tax rate can be directly applied to the final amount to get the MAT. When a company pays tax under MAT in income tax, it can claim a credit for the amount paid, as per section 115JAA. This credit can be adjusted against future tax liabilities when the company’s income tax payable under the normal provisions exceeds the MAT amount. Meaning when the company’s tax liability under normal provisions is bigger than MAT, it can reduce the payable amount using MAT credit. 

To understand how MAT makes a difference, let’s see an example-

Say a company’s taxable income as per the normal provisions is Rs.40,00,000, and the book profit is computed as Rs.90,00,000 for calculating MAT in income tax. To decide the final tax, here’s how the company proceeds-

• Tax under normal provisions:

Rs.40,00,000 × 30% = Rs.12,00,000

Add 4% cess = Rs.12,48,000

• Tax under MAT provisions:

Rs.90,00,000 × 15% = Rs.13,50,000

Add 4% cess = Rs.14,04,000

• Tax liability = Rs.14,04,000

Since the MAT is higher, the company gets a MAT credit entitlement of Rs.1,56,000 (14,04,000 - 12,48,000). Now, next year say your tax liability as per normal provisions comes to Rs.1,23,000. You can use the MAT credit to set it off, and the balance credit of Rs.33,000 can be used next year. 

Conclusion

MAT has basically ended the practice of big corporations paying zero taxes. It’s also helped ensure fair tax rules for foreign companies, SEZs, and those in financial trouble. Looking at the bigger picture, the Minimum Alternative Tax is a step forward for India’s fiscal growth. So, any changes made to this tax law will only support India’s economic development.

FAQs

Ans. Alternative Minimum Tax (AMT) is a tax you might pay instead of regular tax. The current AMT rate is 18.5% (plus surcharge and cess). It applies to adjusted total income if the regular tax is lower than AMT in a financial year. Unlike MAT, which is for companies, AMT is for individuals, HUFs, AOPs, BOIs, and artificial judicial persons with adjusted total income above Rs.20 lakh.

Ans. All companies, including foreign companies with a presence in India, are liable to pay MAT if their taxable income under normal provisions is less than 15% of their book profit. However, certain sectors like power generation, life insurance, and shipping are exempt.

Ans. Form 29B is a report that companies must get from a Chartered Accountant if their income is less than 15% of their book profit. This report is required one month before the due date for filing an income tax return under Section 139.