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Minimum Alternative Tax (MAT)

MAT stands for Minimum Alternative Tax. MAT was introduced by the Finance Act, 1987 with effect from Assessment Year 1998-99. Later on, it was withdrawn by the Finance Act, 1990 and reintroduced by Finance Act, 1996 with effect from 01St April 1997. Currently, the MAT is applicable only to companies as per the provision of Section 115JB.

Object of Levying MAT

Many time, it may happen that the companies have generated substantial income during the year but at the same time, they also enjoy the benefit of various deductions, exemptions, depreciation, etc. on the income generated. Further, the government also provides various tax-linked incentives for companies in various industries to encourage investment. Companies make substantial book profits and declare handsome dividends to their shareholders but have no or insignificant taxable income under the Income Tax Act. Such companies end up paying marginal tax or sometimes zero tax (called zero tax companies) even though they may be capable of paying normal tax.

Hence, to ensure a steady cash flow in the form of tax revenue and at the same time, not completely invalidating the above-mentioned incentives to the companies, the government came up with the concept of MAT. The concept of MAT ensures that the companies shall be taxed in the proportion of their ability to pay tax.

Basis Provision of MAT

As per the concept of MAT, the tax liability of a company will be higher of the following: –

  • The tax liability of the company computed as per the normal provisions of the Income-tax Law, i.e., the tax computed on the taxable income of the company by applying the tax rate applicable to the company. This is also termed as Normal Tax Liability.
  • Tax computed @ 18.5% (plus surcharge and cess as applicable) on book profit of Company. This tax computed by applying 18.5% (plus surcharge and cess as applicable) is called MAT.

MAT is a way of making companies pay a minimum 18.5% (plus surcharge and cess as applicable) amount of tax on their book profit even in case they do not have taxable income as per provision of Income Tax Act, 1961

Note: – MAT is levied at the rate of 9% (plus surcharge and cess as applicable) in case of a company being a unit of International Finance Service center and deriving its income solely in convertible foreign exchange as per subsection (7) of Section 115JB.

Example: The normal taxable income of Same Wise Pvt. Ltd. is Rs 5,00,000 as per Income Tax Provision. Book profit of the company under as per Section 115JB is Rs 12,00,000. Compute the tax liability of Same Wise Pvt. Ltd (excluding surcharge and cess).

Calculation of Tax Amount
Normal tax liability @ 30% (excluding cess) 1,50,000
MAT liability @ 18.5% (excluding cess) 2,22,200
Tax liability of Same Wise Pvt. Ltd. (excluding cess) 2,22,200

 

Example: The normal taxable income of Same Wise Pvt. Ltd. is Rs 20,00,000 as per Income Tax Provision. Book profit of the company under as per Section 115JB is Rs 12,00,000. Compute the tax liability of Same Wise Pvt. Ltd (excluding surcharge and cess).

Calculation of Tax Amount
Normal tax liability @ 30% (excluding cess) 6,00,000
MAT liability @ 18.5% (excluding cess) 2,22,200
Tax liability of Same Wise Pvt. Ltd. (excluding cess) 6,00,000

Note: – The Domestic company is taxable at the rate of 25% if its turnover does not exceed Rs. 250 crore during the previous year 2016-17. It has been assumed Same Wise Pvt. Ltd. has a turnover exceeding Rs 250 Crore.

Companies on which MAT is Applicable

MAT is applicable to each and every company whether public or private and whether Indian or foreign.

Few Exceptions

  • As per Section 115JB(5A), MAT shall not apply to any income accruing or arising to a company from life insurance business referred to in section 115B.
  • As per Explanation 4 to Section 115JB, MAT shall not be applicable and shall be deemed never to have been applicable to an assessee, being a foreign company, if—
    • the assessee is a resident of a country or a specified territory with which India has a Double Taxation Avoidance Agreement (DTAA) referred to in sub-section (1) of section 90 or the Central Government has adopted any agreement under sub-section (1) of section 90A and the assessee does not have a permanent establishment in India in accordance with the provisions of such agreement; or
    • the assessee is a resident of a country with which India does not have an agreement of nature referred to in clause (i) and the assessee is not required to seek registration under any law for the time being in force relating to companies.
  • As per Explanation 4A of Section 115JB, MAT shall not be applicable and shall be deemed never to have been applicable to an assessee, being a foreign company, where its total income comprises solely of profits and gains from business referred to in: –
    • section 44B – Special provision for computing profits and gains of shipping business in the case of non-residents or
    • section 44BB – Special provision for computing profits and gains in connection with the business of exploration, etc., of mineral oils or
    • section 44BBA – Special provision for computing profits and gains of the business of operation of aircraft in the case of non-residents or
    • section 44BBB – Special provision for computing profits and gains of foreign companies engaged in the business of civil construction, etc., in certain turnkey power projects

and such income has been offered to tax at the rates specified in those sections.

  • As per Section 115V-O, MAT will not apply to a shipping income liable to tonnage taxation scheme as provided in section 115V to 115VZC.

Calculation of Book Profit

As per Explanation 1 to Section 115JB(2), Book Profit for the purpose of Section 115JB means net profit as shown in the statement of profit and loss in accordance with the Schedule III to the Companies Act 2013, as adjusted by certain items prescribed below: –

Book Profit for the Purpose of MAT Amount
Net profit as per statement of profit and loss prepared in accordance with Schedule III to the Companies Act, 2013 XXXX
Add: Following items (if they are debited to the statement of profit and loss)
Income-tax paid/payable and the provision thereof (*) XXXX
Amounts carried to any reserves by whatever name called (Other than reserve specified under Section 33AC) XXXX
Provisions for unascertained liabilities XXXX
Provisions for losses of subsidiary companies XXXX
Dividends paid/proposed XXXX
Expenditure related to incomes which are exempt under section 10 [other than section 10(38)] section 11 and section 12 XXXX
The amount or amounts of expenditure relatable to, income, being a share of the taxpayer in the income of an association of persons or body of individuals, on which no income-tax is payable in accordance with the provisions of section 86. XXXX
The amount or amounts of expenditure relatable to income accruing or arising to a taxpayer being a foreign company, from :

(a) the capital gains arising on transactions in securities; or

(b) 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 above income is less than the rate of MAT

XXXX
The amount representing a notional loss on the transfer of a capital asset, being an amount representing notional loss resulting from any change in carrying the amount of said units or the amount of loss on the transfer of units referred to in clause (xvii) of section 47 XXXX
Expenditure relatable to income by way of royalty in respect of patent chargeable to tax under section 115BBF XXXX
Amount of depreciation debited to P & L A/c XXXX
Deferred tax and the provision thereof XXXX
Provision for diminution in the value of any asset XXXX
The amount standing in revaluation reserve relating to a revalued asset on the retirement or disposal of such an asset if not credited to statement of profit and loss XXXX
The amount of gain on transfer of units referred to in clause (xvii) of section 47 computed by taking into account the cost of the shares exchanged with units referred to in the said clause or the carrying amount of the shares at the time of exchange where such shares are  carried at a value other than the cost through as the case may be; XXXX
Less: Following items (if they are credited to the statement of profit and loss)
Amount withdrawn from any reserve or provision if credited to P&L account (**) (XXXX)
Incomes which are exempt under section 10 [other than section 10(38)] section 11 and section 12 (XXXX)
Amount of depreciation debited to statement of profit and loss (excluding the depreciation on revaluation of assets) (XXXX)
Amount withdrawn from revaluation reserve and credited to statement of profit and loss to the extent it does not exceed the amount of depreciation on revaluation of assets (XXXX)
The amount of income, being the share of the taxpayer in the income of an association of persons or body of individuals, on which no income-tax is payable in accordance with the provisions of section 86 if any such amount is credited to the statement of profit and loss (XXXX)
The amount of income accruing or arising to a taxpayer being a foreign company, from :

(a) the capital gains arising on transactions in securities; or

(b) the interest, royalty or fees for technical services chargeable to tax at the rate or rates specified in Chapter XII

if such income is credited to the statement of profit and loss and the income-tax payable on above income is less than the rate of MAT.

(XXXX)
The amount (if any, credited to the statement of profit and loss) representing

(a) notional gain on transfer of a capital asset, being a share of a special purpose vehicle to a business trust in exchange of units allotted by that trust referred to in clause (xvii) of section 47;

(b) notional gain resulting from any change in carrying the amount of said units; or

(c) gain on transfer of units referred to in clause (xvii) of section 47,

The amount representing notional gain on transfer of units referred to in clause (xvii) of section 47 computed by taking into account the cost of the shares exchanged with units referred to in the said clause or the carrying amount of the shares at the time of exchange where such shares are carried at a value other than the cost through statement of profit and loss, as the case may be;

(XXXX)
Income by way of royalty in respect of patent chargeable to tax under section 115BBF (XXXX)
Amount of unabsorbed depreciation and loss brought forward in case of the company against whom an application for corporate insolvency resolution process has been admitted. (XXXX)
Amount of brought forward loss or unabsorbed depreciation, whichever is less as per books of account (in case of a company other than the company undergoing insolvency proceedings) (XXXX)
Profits of a sick industrial company till its net worth becomes zero/positive (XXXX)
Deferred tax, if credited to the statement of profit and loss (XXXX)
Book profit to be used to compute MAT XXXX

Notes

(*) Income-tax paid/payable and the provision thereof shall include: –

  • Any tax on distributed profits under section 115-O (dividend distribution tax – i.e., DDT) or tax on distributed income under section 115R;
  • Any interest charged under this Act;
  • The surcharge, if any, as levied by the Central Acts from time-to-time;
  • Education Cess on Income-tax, if any, as levied by the Central Acts from time-to-time; and
  • Secondary and Higher Education Cess on Income-tax, if any, as levied by the Central Acts from time-to-time.

(**) Withdrawals made from reserves created or provisions made on or after the 1-4-1997, shall be deducted only if the book profit of the year of creation of such reserve has been increased by the amount transferred to such reserve or provisions (out of which the said 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 portion of such grant is transferred from that reserve to statement of profit and loss over the life of the asset in proportion to depreciation charged. In the year in which these grants were credited to special reserve, they had not been added to net profit for calculation of book profit subjected to MAT. Therefore, in the year of transfer to P&L, the amounts so transferred shall not be reduced from net profit while calculating book profit for the purpose of MAT.

MAT Credit

As per Section 115JAA, the excess of MAT paid over and above the normal income tax liability is called MAT Credit. The credit of MAT can be utilised by the company in the year in which the normal tax liability is more than MAT. The maximum set off of MAT credit shall be allowed to the extent of the difference between the tax as per the normal provision of the act and as per MAT provisions. In other words, the company has to pay the amount of tax calculated as per MAT provisions.

MAT credit can be carried forward and adjusted to the normal tax payable only up to 15 financial years from the year in which such MAT is paid.  This is with effect from the financial year 2017-18. Previously, MAT credit can be carried forward only for a period of 10 years.

Other Points

  • No interest shall be paid on the MAT credit by the Department.
  • In case of conversion of the company into a limited liability partnership under the Limited Liability Partnership Act 2008, the MAT credit shall get lapse.

Example: The normal taxable income of Same Wise Pvt. Ltd. is Rs 5,00,000 as per Income Tax Provision. Book profit of the company under as per Section 115JB is Rs 12,00,000. Compute the MAT Credit available to Same Wise Pvt. Ltd.

Calculation of MAT Credit Amount
Normal tax liability @ 30% plus 3% cess 1,54,500
MAT liability @ 18.5% plus 3% cess 2,28,660
MAT Credit to be carry forward for next 15 years 74,160

About Rohit Pithisaria

Rohit Pithisaria is a Practicing Chartered Accountant from Jaipur and been in practice for more than 7 years. He is actively writing from very beginning of his professional career and is author of various tax articles and blogs.

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