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What is MAT (Minimum Alternate Tax)?

MAT Means Minimum alternate tax. It is a tax levied under section 115JB of the income tax act 1961.

Government introduces the concept of MAT to target those companies that earn huge profits and pay the dividends to their shareholders but pay nil or minimal taxes to the government by availing several exemptions, deductions and benefits under the income tax act. It was introduced due to rise in the number of zero tax companies.

Zero tax companies are the companies which show higher profits and pay out dividends to their shareholders but not paying taxes to the government. MAT is started by the government to regularize such tax payers.

In other words, MAT is a way of making companies liable to pay a minimum amount of tax based on the book profits of the company. It is an indirect tax payable by the companies. The MAT is calculated as 18.5% of the book profits. A company has to pay taxes choosing between two of the following (whichever is higher) –

What is MAT (Minimum alternate tax)? How to Calculate MAT
  1. Tax calculated as per the normal provisions of income tax act (30% tax rate plus 3% education cess plus surcharge, if applicable)
  2. Tax calculated as per the MAT provisions of income tax (18.5% tax rate plus 3% education cess plus surcharge, if applicable)

Main Objective

  1. The main objective of MAT is to ensure that every company that is earning big profits and has the ability to pay taxes should not avoid the payment of income tax under section 115JB of the income tax act.
  2. To collect taxes from all the zero tax companies.

MAT Applicability

MAT is only applicable to the corporate companies and not applicable to individuals, HUF’S, partnership firms etc. Foreign companies with income sources in India are also liable to pay MAT. It is not applicable to the companies dealing with infrastructure and power sectors. Income from charitable activities, free trade zones is also excluded under MAT.

How to Calculate MAT?

All companies recording book profits shall have to pay a minimum alternate tax @18.5% (plus surcharge & cess as applicable) under the companies act.

Book profits is the net profit shown in the profit and loss a/c for the financial year calculated as per company’s act, which is increased and decreased by the following items –

Inclusions to Net Profit

  1. If calculated, Income tax payables as per the normal provisions of the income tax act.
  2. Paid or proposed dividend
  3. Amount shifted to any reserve
  4. Provision of bad debts
  5. Provision of deferred tax
  6. Provision of Depreciation
  7. Provision for losses of Subsidiary
  8. Amount of cost on expenses relating to exemption income under section 10 (except u/s 10(38))

Exclusions to Net profit

  1. Amount withdrawn from any reserve
  2. Amount of deferred tax, if any
  3. Amount of depreciation debited to P&L a/c
  4. Amount of loss brought forward
  5. Amount of income relating to exemption income under section 10 (except u/s 10(38))

Difference between Minimum alternate tax & Alternate minimum tax

Basis of distinction Minimum alternate tax Alternate minimum tax
Meaning It means the amount of tax computed on book profits. It means the amount of tax computed on the adjusted total income.
Applicable It is applicable on corporate companies AMT is applicable to LLP’s and non-corporate assessee’s
Taxable It is taxable on book profits It is taxable on adjusted total income
Tax rate 18.5% 18.5%
Surcharge The surcharge is applicable here. The surcharge in tax rate is not applicable in case of LLP

MAT Credit

MAT Credit is the difference between the tax calculated under the normal provisions of the income tax act and tax calculated under the MAT provisions of the act. As per section 15JAA, if any amount of tax is paid by the company as MAT, the company has the right to claim the credit of such tax.

MAT credit = Tax calculated as per MAT Provision – Tax calculated as per normal provision

For ex- XYZ company has the taxable income of INR 50,00,000 and books a profit of Rs.80,00,000 for the FY 2018-19? Calculate the MAT credit?

Calculation of MAT credit

First Step - Calculation of tax in both the provisions (tax payable will be higher of the following two)

  1. Tax as per normal provision

    50,00,000*30% plus 3% = 15,00,000(50,00,000*30%) + 45000(15,00,000*3%)= Rs.15,45,000

  2. Tax as per MAT Provision

    85,00,000*18.5% plus 3% = 15,72,500(85,00,000*18.5%) + 47175(15,72,500*3%)= Rs.16,19,675

    Therefore, tax payable by the company will be Rs.16,19,675

Second step - MAT credit = Rs.16,19,675 (Tax as per MAT provision) – Rs.15,45,000 (Tax as per normal provision) = Rs.74,675

If the tax paid by the company is more than the tax accrued, the excess amount is credited back to the company as tax credit.

No interest shall be paid on tax credit by the department. However as per section 115JAA, Company is allowed to carry forward the tax credit and can set off the same in the next financial year.

MAT credit shall be carry forward and set off for 15 consecutive assessment years succeeding the year in which the tax credit first accrued. If MAT credit is not utilized by the company within 15 years, then it will get lapse. MAT credit set off is allowed only if tax payable as per normal provisions is greater than the tax payable as per MAT.

We will try to understand MAT credit in detail with the help of table below –

Asst. Year Tax payable under MAT Tax payable as per normal provisions Actual tax payable Tax credit u/s 115JAA Tax credit adjusted Total tax credit available
2014-15 10,00,000 6,00,000 10,00,000 4,00,000 - 4,00,000
2015-16 11,00,000 7,50,000 11,00,000 3,50,000 - 7,50,000
2016-17 12,00,000 9,00,000 12,00,000 3,00,000 - 10,50,000
2017-18 9,00,000 11,00,000 8,00,000 - 3,00,000 7,50,000
2018-19 8,00,000 13,00,000 7,00,000 - 6,00,000 1,50,000

Conclusion

Tax is the most important element as it is the revenue for the government on which the government operates. Introduction of MAT is the best step taken by the government as it will keep an eye on the zero tax companies as well as helps in reducing the tax evasion in our country.