MAT – A Brief Introduction

Minimum Alternative Tax is payable under the Income Tax Act. The concept of MAT was introduced to target those companies that make huge profits and pay the dividend to their shareholders but pay no/minimal tax under the normal provisions of the Income Tax Act, by taking advantage of the various deductions, and exemptions allowed under the Act. But with the introduction of MAT, the companies have to pay a fixed percentage of their profits as Minimum Alternate Tax. MAT is applicable to all companies, including foreign companies.

MAT is calculated under Section 115JB of the Income-tax Act. Every company should pay higher of the tax calculated under the following two provisions:

1. Tax liability as per the Normal provisions of income tax act(tax rate 30% plus 4% Edu cess plus surcharge (if applicable)

TAX LIABILITY AS PER THE NORMAL PROVISIONS OF THE INCOME TAX ACT WHOSE TURNOVER OR GROSS RECEIPTS WAS OF Rs.250Cr DURING THE FY 2016-17.(TAX RATE 25% PLUS 4%EDUCATION CESS PLUS SURCHARGE(IF APPLICABLE)

2. Tax liability as per the MAT provisions are given in Sec 115JB(18.5 % of Book Profits Plus 4 % education cess plus a surcharge if applicable). The tax rate is 15% with effect from AY 2020-21 (FY 2019-20).

How to calculate MAT?

MAT is equal to 18.5% (15% from AY 2020-21) of Book profits (Plus Surcharge and cess as applicable). Book profit means the net profit as shown in the profit & loss account for the year as increased and decreased by the following items:

Additions to the Net Profit (If debited to the Profit and Loss Account):

1. Income Tax paid or payable if any calculated as per normal provisions of income tax act.

2. Transfer made to any reserve

3.  Dividend proposed or paid

4. Provision for loss of subsidiary companies

5. Depreciation including depreciation on account of revaluation of assets

6. Amount/provision of deferred tax

7. Provision for unascertained liabilities e.g. provision for bad debts

8. Amount of expense relating to exempt income under sections 10,11,12 (except sec 10AA and 10(38)  This means income under section 10AA & long term capital gain exempt under section 10(38) are subject to MAT . Provision made for diminution in the value of any asset.

Deletions to the Net Profit (If credited to the Profit and Loss Account)

1. Amount withdrawn from any reserves or provisions

2. The amount of income to which any of the provisions of section 10, 11 & 12 except 10AA & 10(38) applies.

3. Amount withdrawn from revaluation reserve and credited to profit & loss account to the extent of depreciation on account of revaluation of asset.

4. Amount of loss brought forward or unabsorbed depreciation, whichever is less as per the books of account. However, the loss shall not include the depreciation. (if loss brought forward or unabsorbed depreciation is nil then nothing shall be deducted.)

5. Amount of Deferred Tax, is any such amount is credited in the profit & loss account

6. Amount of depreciation debited to the Profit and Loss Account (excluding the depreciation on revaluation of Assets).

What is MAT Credit?

As discussed in earlier part, a company has to pay higher of normal tax liability or liability as per MAT provisions. If in any year the company pays liability as per MAT, then it is entitled to claim credit of MAT paid over and above the normal tax liability in the subsequent year(s).The provisions relating to carry forward and adjustment of MAT credit are given in Section 115JAA.

(However, no interest shall be paid on this Tax credit by the Department.)

Such tax credit shall be carried forward for 15 Assessment Years immediately succeeding the assessment year in which such credit has become allowable. This is with effect from AY 2018-19 prior to which MAT could be carried forward only for a period of 10 AYs. For instance, if the excess tax is paid is in FY 2016-17, then the credit of such tax can be carried forward from in FY 2017-18.

MAT credit shall be allowed to be set off in a year when the tax becomes payable on the total income in accordance with the normal provisions of the Act. Set off shall be allowed to the extent of difference between the tax on the total income under normal provision and tax which would have been payable as per MAT under section 115JB.