Minimum Alternate Tax

Minimum Alternate Tax

Why was it introduced? 

Companies were reporting profits as per their books (financial statements) but were paying lesser taxes and in some cases zero income tax by availing/taking advantage of various exemptions and deductions available to them under the Income Tax Act.

MAT provision was introduced to ensure that companies with huge profits as per Financial statements, don't avoid tax and contribute their fair share of taxes to the exchequer.

When was it introduced?

MAT provisions was introduced in 1987 with an intend to bring "zero tax companies" within tax ambit. 

The 1991 liberalization had significant effects on Indian economy, resulting in increase in foreign investment, trade liberalization, foreign exchange reforms etc. Consequently, systematic tax reforms were also implemented, bringing more companies under ambit/scope of taxation and widening the tax base of direct tax payers.  At that time, MAT was withdrawn by Finance Act 1990 w.e.f AY 1991-92.

Subsequently through Finance (No.2) Act 1996, MAT was re-introduced w.e.f 1.4.1997. 

MAT is applicable to whom?

Minimum alternate tax is applicable to all companies including foreign companies , with the exception of the following:

MAT is not applicable with respect to 

-income received by a company from life insurance business,

-income received by shipping companies that are liable to tonnage taxation scheme.

-Those foreign companies that are resident in countries with which India has Double taxation avoidance agreement  AND the company does not have permanent establishment in India in accordance with DTAA.

-Foreign companies for which there is no DTTA applicable and is not required to seek registration under any law in force, relating to the companies.

-Foreign companies whose total income includes profits gained from businesses mentioned in Section 44AB, 44BB, 44BBA or 44BBB of income tax act.

Who are all liable to pay MAT?

Every company, whose tax on total income (including surcharge and cess) is less than the 15% of adjusted book profit (including surcharge and cess), is liable to pay Minimum alternate tax. 

How is MAT calculated?

MAT is calculated at 15% of the book profit of the tax assessee. 

If the company is an unit located in an International Financial Services Centre (IFSC), it shall be subject to a reduced MAT rate of 9% instead of 15%. But MAT not applicable to companies in IFSC opting for new tax regime. 

So, What is book profit?

Book profit for the purpose of MAT refers to  

Net profit as shown in P&L prepared in accordance with Schedule III to Companies Act, ADJUSTED FOR THE BELOW LINE ITEMS:

To be added back 

Following expenses or provisions or losses if they were previously debited while calculating net profit, shall be disallowed/added back for the purpose of this adjustment, to arrive at book profit as per MAT

1. Income-tax due/ paid and the provision thereof
2. Amounts carried to any reserves except those reserves that are specified under Section 33AC
3. Provisions for bad debts and unascertained liabilities
4. Provisions for losses of subsidiary companies
5. depreciation debited including the depreciation on asset revalued
6. Dividends paid/proposed
7. provision for diminution in value of assets
8. Expenditure related to exempted incomes listed in (s.10,11,12) but excluding those relating to income under Section 10(38)
9. Amount of notional loss debited
10. provision for loss of subsidiary companies
11. expenses relating to income by way of royalty on patents taxable u.s 115BBF
12. Deferred tax expense and its provision
13. Expenditure related to income accruing to a foreign company from (a) the capital gains transactions in securities or (b) income in the form of interest, royalty, or fees for technical services chargeable to tax at the rate specified in Chapter XII, if the income-tax payable on above income, is less than the rate of MAT.
14. Expenses relating to the company’s share of income from a BOI or AOP on which no income tax is payable under as per provisions of s.86

Following incomes/provision reversals, if they were previously excluded while calculating net profit, shall be added back for the purpose of this adjustment, to arrive at book profit as per MAT

1. That portion of balance in revaluation reserve relating to the revalued assets that are getting retired or disposed in the FY, (provided, such amount is not already credited to the profit and loss account)

To be deducted:

Following income/gain/provision reversals if they were previously credited while calculating net profit, shall be exempted/deducted for the purpose of this adjustment, to arrive at book profit as per MAT

1. Amount withdrawn from any reserve or provisions.
2. Incomes exempt under sections 10, 11 and 12 excluding those under S. 10(38)
3. company’s share of income from a BOI or AOP on which no income tax is payable under as per provisions of s.86
4. Earnings of Sick Industrial company until its net worth becomes either zero or positive
5. Any notional gain amount
6. Income by way of royalty on patents taxable u.s 115BBF
7. Income accruing to a foreign company from (a) the capital gains transactions in securities or (b) income in the form of interest, royalty, or fees for technical services chargeable to tax at the rate specified in Chapter XII, if the income-tax due on above income is less than MAT rate
8. depreciation amount on revaluation of assets which is taken out of the revaluation reserve and credited to the profit and loss statement
9. Amount of deferred tax

Following expenses/losses if they were previously excluded while calculating net profit, shall be allowed as deduction for the purpose of this adjustment, to arrive at book profit as per MAT

1. Depreciation excluding the depreciation on revaluation of assets
2. loss brought forward or unabsorbed depreciation, whichever is less as per books of accounts. (applicable in case of company other than thew  company undergoing insolvency proceedings.)
3. In case of company for which insolvency procedure is ongoing: total of Unabsorbed depreciation + the losses brought forward (excluding unabsorbed depreciation) shall be allowed to be reduced from the book profits.

Note:  this book profit computation must be certified by a chartered accountant in form 29B.

The tax audit report along with form 29B must be filed before the due date for filing return ie 30th September of AY.

As per Section 271B, if the form 29B is not filed within due date, the assessee will be subject to penalty for late filing which is Rs. 1,50,000 or 0.5% of the total turnover or gross receipts of the business, whichever is lower.

Calculation of MAT

Step 1: As per section 115JB  provisions explained above, adjusted book profit is determined, and MAT is computed at the rate of 15% (plus surcharge and HEC where applicable) of that profit. 

Step 2: Tax is computed as per normal provisions of income tax law on the taxable income of the company.

Step 3.Final step: higher of the above, is paid as corporate income tax .

what is MAT credit ?

when MAT amount for a company is greater than the normal tax liability, the difference between the two ie the additional amount as per paid over and above the normal tax provisions, is called MAT credit. 

MAT credit can be carried forward and claimed, in the assessment year in which the normal tax liability is greater than the MAT liability. 

but it is important to note 

Maximum MAT credit that you can c/fwd & claim= difference between normal tax liability and the MAT liability of the year, for which MAT set off credit is being availed.

Maximum period for Carry forward and set off of MAT credit :

MAT credit can be carried forward up to a period of 15 assessment years from the year MAT credit was first generated.