Aug 31,2020 | 04 min read

Minimum Alternate Tax

By Sonali Sinha

Introduction 

The Income Tax Act makes it mandatory for the corporations or individuals to pay tax on the completion of a financial year failing which they are subjected to certain stringent penalties. The Minimum Alternate Tax (MAT) was initiated by the Finance Act, 1996 mainly for corporations making huge profits. This concept was brought as corporations took benefits from various exemptions, depreciation, deductions, etc, given under the Income Tax Act, 1961 to lessen its tax liability. So, it can be said that the sole objective behind the introduction of MAT was that the companies pay at least a minimum proportion of tax of its earning to the government.

MAT

The concept of MAT was introduced for those corporations that earn huge profits and pay a big dividend to its shareholders but pay no/minimal tax to the government. So the MAT is a small or minimum amount payable as tax to the government. Section 115JB of the Income Tax Act provides that all companies have to pay a certain amount as corporate tax whichever is higher of the following calculated as:

  • Normal Tax Liability: Under this tax liability is calculated in accordance with the general provisions of the Income Tax Act, 1961. It is applicable to companies having gross receipts or turnover of Rs. 250 crore during the financial year 2016-17. Here, the tax rate applicable is 30% with 4% as edu cess with surcharge (if applicable). 

  • MAT: It is provided under section 115JB of Income Tax Act, 1961. It calls for 18.5% (previously)  of book profit with 4% edu cess with a surcharge (if applicable). With effect from Assessment Year 2020-21, the tax rate is 15%.

In the case of the companies that are the units or branches of International Financial Services Centers and obtain their income in convertible foreign exchange, the MAT is levied at a rate of 9% with cess and surcharge as provided.

Calculation of MAT

MAT is calculated at 18.5% of Book Profits (now 15%). Book Profit is nothing, but the net profit as reflected in the Profit and Loss Account of the Financial Year. It may increase or decrease by the below items:

  • Amount transferred to Reserve A/C
  • Any sum paid or proposed as Dividend
  • Depreciation comprising depreciation on the revaluation of assets.
  • Provision of Deferred TaxProvision of any Unforeseen liability
  • Income tax paid or payable as per IT Act
  • Provision of loss for any subsidiary corporation
  • The amount related to exempt income

There are even some deductions available on Book Profit, given as follows:

  • Any amount is withdrawn from the reserve or any provision.
  • Any exempted income under sections 10, 11, and 12 but not under section 10(38).
  • The income of a person arose from the AOP or BOI where no income tax is payable under section 86.

Further, the book profit calculated in accordance with the provisions of Income Tax must be certified in Form no. 29B by a Chartered Accountant. And such certification report must be obtained before the due date of ITR filing in order to prevent any penalties levied under the Act. 

Who are liable to pay MAT?

Any company either public or private, having Indian origin or foreign is liable or entitled to pay MAT in the case where income tax payable is less than 15% of the book profit and loss and surcharge.

When MAT is not applicable?

It is not applicable in cases where income is obtained from life insurance business and shipping income where tonnage tax is levied. Tonnage Taxation is mentioned under section 115V to 115VZC of Income Tax, 1961.

In the case of a foreign company, MAT will not apply to:

  • The company that belongs to the country to which the Indian government has entered into an agreement with under section 90(1) of the Income Tax Act. Also, if the company does not have a permanent establishment in the territory of India as agreed in the agreement under section 90(1).
  • The company that has not entered in any such agreement plus also does not need to register itself under any act or any law for the time being in force.
  • Section 115JB (4A) provides that the provisions of MAT are not applicable to the foreign companies having total income originating from the businesses pertained to section 44AB, 44BB, 44BBA, 44BBB under the Income Tax Act, 1961.
  • Also, the dividend income paid by domestic companies is considered as an exemption to tax. Further, provided that the dividend must be less than Rupees 10 lakh for the relevant Financial Year. 

MAT Credit

As stated above, the company needs to pay corporation tax as of normal tax liability or MAT liability, whichever is higher. If MAT exceeds the normal tax liability then the difference between the two is called MAT Credit.

Hence, MAT liability- Normal Tax Liability= MAT Credit

Carry Forward Process

It is in effect as per the Income Tax Rules. Now, the credit of MAT may be claimed in the Assessment Year where the normal tax liability exceeds the MAT liability. The maximum amount that can be claimed must not exceed the difference (MAT Credit) for the year in which, it is to be availed.

Period of Carrying Forward:

The MAT credit can be carried forward for a period of 15 Assessment Year instantly after the Assessment Year for which it is made permissible. It has been in effect from Assessment Year 2018-19. Earlier to this, it was carried forward for a period of 10 years only. 

It is to be noted that the taxpayer does not receive any interest on MAT Credit.

Also, the MAT credit must be set off in the year where tax is payable on the Total Income as per the provisions of the Income Tax Act. 

Limit of Set-Off: 

The Set-Off shall be permitted to the extent of the amount derived as a difference between the tax payable under normal provisions of Income Tax and the tax payable as MAT. 

Webliography:

  1. Minimum Alternate Tax & Alternate Minimum Tax, Retrieved from https://taxguru.in/income-tax/minimum-alternate-tax-alternate-minimum-tax.html?amp

  2. Tax Planning under MAT, (18 Aug 2020), Retrieved from https://cleartax.in/s/tax-planning-under-mat

Minimum Alternate Tax, Retrieved from https://www.paisabazaar.com/tax/minimum-alternate-tax-mat/amp/

Income Tax Returns (ITR) FY 2020-2021 | HDFC Life


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