Minimum Alternative Tax (MAT): MAT, which implies Minimum Alternative Tax. The Finance Act, 1987 of India, introduced MAT with influence from Assessment Year 1998-99. The Finance Act, 1990 withdrew it, but later on, it got reintroduced by Finance Act, 1996, with effect from 01st April 1997. At present, the MAT is relevant only to companies as per the requirement of Section 115JB.
- The Object Of Levying MAT
- Basis Provision Of MAT
- MAT Credit
- Calculation of Tax Amount
- Companies on which MAT is Applicable
- Calculation of Book Profit
In several circumstances, it may occur that the companies have created substantial income throughout the year. Still, at the same time, they also relish the benefit of various deductions, depreciation, exemptions, etc., on the income produced. Further, various tax-linked incentives in various industries were provided by the government to encourage investment.
Companies have no or insignificant taxable income under the Income Tax Act even though they make substantial book profits and handsome dividends are declared to their shareholders. Such companies sometimes pay zero tax (called zero tax companies) or marginal tax even though they may be capable of paying regular tax.
Hence, to not completely invalidate the above-mentioned incentives to the companies, and at the same time, to ensure a steady cash flow in the form of tax revenue, the government developed the MAT concept. The concept of MAT assures that the companies shall be taxed in the proportion of their capacity to pay tax.
As per the theory of MAT, a company’s tax liability will be higher if: –
- The tax is calculated as per the standard provisions of the Income-tax Law on the liability of the company, i.e., by applying the applicable tax rate to the company on the company’s taxable income, the tax computed. This is also called Normal Tax Liability.
- The book profit of the Company is the considered amount on which tax is computed @ 18.5% (plus cess and surcharge as applicable). This tax which is calculated by applying 18.5%, including the surcharge and cess charges, is called MAT.
MAT is a process of making companies pay as per provision of Income Tax Act, 1961 of a minimum amount of tax of 18.5% (plus cess and surcharge as applicable) on their book profit even in case the company do not possess taxable income
Note: – In case of a company being a unit of International Finance Service centre, MAT is levied at the rate of 9% (plus cess and surcharge as applicable) and as per subsection (7) of Section 115JB, deriving its income solely in convertible foreign exchange.
Example: The Same Wise Pvt. Ltd. company’s normal taxable income is Rs 5,00,000 as per Income Tax Provision. The book profit of the Same Wise Pvt. Ltd. company under Section 115JB is Rs 12,00,000. In order to compute the tax liability of Same Wise Pvt. Ltd company (excluding cess and surcharge).
Calculation of Tax- Amount
- Normal tax liability is charged at the rate of 30% (excluding cess): 1,50,000
- MAT liability is charged at the rate of 18.5% (excluding cess): 2,22,200
- Tax liability charged on Same Wise Pvt. Ltd. (excluding cess): 2,22,200
Example: As per Income Tax Provision, the regular taxable income of Same Wise Pvt. Ltd. is Rs 20,00,000. Under Section 115JB, the book profit of the company is Rs 12,00,000. Estimate the tax accountability of Same Wise Pvt. Ltd (excluding surcharge and cess).
The excess of MAT paid above and over the normal income tax liability is called MAT Credit, as mentioned in Section 115JAA. When the normal tax liability is more than MAT in a specific year, the credit of MAT can be utilised by the company. The maximum set off of MAT credit shall be allowed to the extent of the difference between the tax as per MAT provisions and the normal provision of the act. In other words, the amount of tax calculated as per MAT provisions has to paid or bore by the company.
MAT credit can be adjusted and carried forward to the normal tax payable entirely up to 15 financial years from the year when such MAT was started to be paid. This came into play from the financial year 2017-18. Earlier, only for a period of 10 years were allowed MAT credit to carry forward.
the Department shall pay no interest on the MAT credit.
In the matter of transformation of the company into a partnership of limited liability
under the Limited Liability Partnership Act 2008, the MAT credit shall get lapse.
Example: As per Income Tax Provision, the Same Wise Pvt. Ltd. company’s normal taxable income is Rs 5,00,000. As per Section 115JB, the book profit of the company is Rs 12,00,000. Calculate the MAT Credit prepared to Same Wise Pvt. Ltd.
- Standard tax liability is charged at the rate of 30% (excluding cess) is: 6,00,000
- MAT liability is charged at a rate of 18.5% (excluding cess) is: 2,22,200
- The liability of Tax of the Same Wise Pvt. Ltd. company (excluding cess) is: 6,00,000
Note: – At the rate of 25%, the Domestic company is taxable if the total turnover does not exceed Rs. 250 crore during the previous year 2016-17. The Same Wise Pvt. Ltd. is assumed to have a turnover exceeding Rs 250 Crore.
Calculation of MAT Credit —- Amount
- Normal tax liability at the rate of 30% plus 3% cess is: 1,54,500
- MAT liability at the rate of 18.5% plus 3% cess is: 2,28,660
- MAT Credit to be carried forward for next 15 years: 74,160
MAT applies to each and every company, whether the company is Indian or foreign or whether private or public.
- MAT shall not apply to any income arising or accruing to a company from the life insurance business as per Section 115JB(5A) or suggested in section 115B.
- MAT shall never be deemed and shall not be applicable to have been applicable to an assessee as per Explanation 4 of Section 115JB, being a foreign company, if—
- if the Double Taxation Avoidance Agreement (DTAA) referred to in the sub-section states that the assessee is a resident of a country or a specified territory of India.
- if there is an agreement under the subsection of section 90 of the Central Government
- if the assessee in accordance with the provisions of such agreement does not have a permanent establishment in India under section 90A
- if the assessee does not have an agreement of nature referred to in clause (i) but is a resident of a country with which India and the assessee is not required to seek registration under any law for the time being in force relating to companies.
MAT shall never be deemed or shall not be applicable to have been applicable to an assessee, being a foreign company, as per Explanation 4A of Section 115JB, where its total income constitutes solely of gains and profits from a business referred to in: –
- section 44B – which states the case of non-residents, special provision for computing gains and profits of shipping business or
- section 44BB – which states the connection with the business of exploration, special provision for computing profits and gains etc., of mineral oils or
- section 44BBA – which states the case of non-residents, special provision for computing gains and profits of the business of operation of aircraft or
- section 44BBB – which states the business of civil construction, etc., have a special provision for computing profits and gains of foreign companies engaged in the etc., in specific turnkey power projects, and in those sections, such income has been offered to tax at the rates specified.
MAT will not be applicable to a shipping income liable to tonnage taxation scheme as per Section 115V-O or as implemented in section 115V to 115VZC.
Book Profit for the intention mentioned in Section 115JB means the net profit as shown in the statement of profit and loss as per the Schedule III to the Companies Act 2013 is adjusted by certain items prescribed below: –
- For the purpose of MAT, the concept of Book Profit is developed.
- According to the provisions mentioned in Schedule III to the Companies Act, 2013, the statement of profit and loss prepared is executed as per the net profit.
Adds: if following items are debited to the statement of profit and loss
- Income-tax payable/paid and the provision thereof (*)
- Amounts transferred to any reserves by whatever denomination called (Other than reserve specified under Section 33AC)
- Unascertained liabilities and the requirements made on it
- Losses of subsidiary companies and the requirements made on it
- Dividends proposed/paid
- Under section 11, section 12, and section 10 [other than section 10(38)], the incomes are exempt, which are related to expenditure
- Under the provisions of Section 86 of the ITR Act, which mentions that the amount or amounts of expenditure relatable to income, being a share of the taxpayer in the income of an association or body of individuals or persons, on which no income tax is obligatory
- The amounts of expenditure or charges relatable to income arising or accruing to a taxpayer being a foreign company, from :
- the gained capital arising on transactions in securities; or
- the interest, royalty or fees for technical services chargeable to tax at the rate or rates specified in Chapter XII
- if the income tax payable on the earlier income is shorter than the rate of MAT. The amount signifying a notional loss on the alteration of a capital asset, being an amount expressing notional loss resulting from any change in bringing the number of said units or the amount of loss on the transference of units introduced to in Clause (xvii) of Section 47
- Patent chargeable to tax under section 115BBF on the expenditure relatable to income by way of royalty
- Cost of depreciation debited to profit and loss account.
- The provision related to Deferred tax
- The provision mentioned for diminution in the actual value of any asset
- The amount pertaining to a revalued asset on the retirement or disposal of such an asset has been standing in revaluation reserve if not credited to the profit and loss account statement.
- The Clause (xvii) of Section 47 refers to the amount of gain on transfer of units which is computed by taking into account the carrying amount of the shares at the time of exchange, or the cost of the shares exchanged with units referred to in the said clause whereas the case may be before-mentioned shares are conducted at a value other than the cost;
Less: if the following items are credited to the statement of profit and loss:
The amount is removed from any provision or reserve while being credited as the P&L account
[Withdrawals made from provisions made on or reserves created after 1-4-1997 shall be subtracted only if the book profit of the year of production of such reserve has been raised by the amount transferred to such provisions or reserve (out of which the declared amount was withdrawn).
For example, Governmental grants relating to depreciable assets are credited to special reserve (i.e., not to statement of profit and loss) in the year of receipt, and a share of such grant is shifted from that reserve to statement of profit and loss throughout the asset in proportion to charged depreciation.
In the year in which these donations were credited to individual reserve, and then such reserve had not been added to net profit for computing of book profit subjected to MAT. Therefore, while calculating book profit for the purpose of MAT, the amounts so transferred shall not be reduced from net profit in the year of transfer to P&L.]
- Incomes that are excluded under section 11, section 12 and section 10 [other than section 10(38)]
- When in the statement of profit and loss (excluding the depreciation on revaluation of assets), the amount of depreciation is debited
- The amount has been credited to the statement of profit and loss after being withdrawn from the revaluation reserve to the extent that it does not surpass the depreciation on assets revaluation.
- The amount of income on which no income-tax is payable in accordance with the provisions of section 86, which states that the share of the taxpayer in the income of an association or body of individuals or persons if any such amount is credited to the statement of profit and loss
- The amount of income arising or accruing to a taxpayer being a foreign company, from :
- the arising of capital gains on transactions made in securities; or
- the interest, fees or royalty for technical services specified in Chapter XII, which states to be chargeable to tax at the before mentioned rate or rates.
- If the income tax payable on the above income is less than the MAT rate, then such income is credited to the statement of profit and loss. If any amount is credited to the representing statement of profit and loss
- Clause (xvii) of Section 47 states that the notional gain on transfer of a capital asset, being a share of a business trust of a special purpose vehicle in exchange for units allotted by that trust.
- notional gain resulting due to any change in carrying the amount of said units; or
- As referred to in Clause(XVII) of Section 47, the gain on transfer of units
- As referred to in Clause(XVII) of Section 47, the amount representing the notional gain on transfer of units is computed by the carrying amount of the shares at the time of exchange or considering the cost of the shares exchanged with units referred to in the said clause. In contrast, the case may be, such shares/cost are carried at a value other than the cost within the statement of profit and loss, and under section 115BBF, the Income by way of royalty in respect of copyright chargeable to tax.
- In the case of the company upon whom an application for corporate insolvency resolution has been charged on the amount of unabsorbed depreciation and loss that brought forward and the admitted process.
- Amount of unabsorbed depreciation or brought forward loss, whichever is minor as per books of account (in a matter of a company other than the company bearing insolvency proceedings)
- Until the profits on the net worth become zero/positive of a sick industrial company
- The tax that has been deferred is credited to the statement of profit and loss.
- Book profit to be utilised to calculate MAT.
(*) Income-tax payable/paid, and the provision thereof shall incorporate: –
- Under section 115-O (dividend distribution tax – i.e., DDT) Any tax on distributed profits or tax on distributed income under section 115R;
- Under this Act, any interest charged; especially the surcharge, if any, as levied by the Acts made by the Central from time to time;
- Income-tax Education Cess, if any, as levied by the Acts made by the Central from time-to-time; and
- Higher and Secondary Education Cess on Income-tax, if any, as levied by the Acts made by the Central from time to time.