Important Keyword: Business and Profession Income, Income Tax Act, MAT, Minimum Alternate Tax.
Table of Contents
What is Minimum Alternate Tax or MAT?
Introduction of Minimum Alternate Tax (MAT) aimed to address discrepancies between taxable income and book profits. It primarily targets companies generating substantial profits yet paying minimal taxes due to various deductions and exemptions provided by the Income Tax Act. MAT, outlined in section 115JB, mandates such companies to pay a fixed percentage of their profits as minimum tax.
Under MAT provisions, companies must pay the higher of two tax liabilities:
- Tax calculated as per regular provisions of the Income Tax Act, at a rate of 30% plus 4% education cess and surcharge if applicable. Tax liability for the domestic companies is 25% plus 4% cess and applicable surcharge, as per the normal provisions of the Income Tax Act whose turnover or gross receipts is upto Rs.400 crore.
- Tax computed under MAT provisions at a rate of 15% of Book Profit effective from Assessment Year 2020-21.
This ensures that profitable companies, despite utilizing deductions and exemptions, contribute a fair share of taxes to the government. MAT serves as a mechanism to prevent tax avoidance strategies employed by certain entities, promoting equity and fairness in the taxation system.
Calculation of MAT or Minimum Alternate Tax
MAT incorporates 15% (MAT was 18.5% prior to AY 2020-21) of book profits. In this context, book profit refers to the net profit depicted in the profit and loss account for the year, adjusted by certain factors.
MAT calculations involve adjustments to the net profit, incorporating both additions and deletions from the profit and loss account. Here's a breakdown of these adjustments:
Additions to Net Profit:
- Income tax paid or payable as per regular provisions of the Income Tax Act.
- Transfers made to reserves.
- Proposed or payable dividends.
- Provisions for losses of subsidiary companies.
- Depreciation, including revaluation of asset depreciation.
- Amounts or provisions for deferred tax.
- Provisions for unascertained liabilities.
- Expenses related to exempt income under sections 10, 11, 12, excluding sections 10AA and 10(38).
Deletions from Net Profit:
- Withdrawals from reserves or provisions.
- Income covered under sections 10, 11, and 12, excluding sections 10AA and 10(38).
- Withdrawals from revaluation reserves, offset by depreciation on revalued assets.
- Loss brought forward or unabsorbed depreciation, whichever is lesser, excluding depreciation.
- Deferred tax credits credited to the profit and loss account.
- Depreciation debited to the profit and loss account, excluding depreciation on revalued assets.
These adjustments ensure that the net profit considered for MAT accurately reflects the taxable income of the company, accounting for various income, expenses, and provisions as per the Income Tax Act.
Applicability of MAT
Understanding Minimum Alternate Tax (MAT) and Minimum Alternate Tax Credit (MAT Credit):
MAT is a tax levied on companies if the income tax payable on their total income, as per regular provisions of the Income Tax Act, falls below 15% of their book profit plus surcharge and health & education cess. However, certain exemptions from MAT apply to specific entities:
- Domestic companies opting for tax regimes under Section 115BAA or Section 115BAB.
- Companies earning income from life insurance business under Section 115B.
- Shipping companies subject to tonnage taxation.
Additionally, as per Explanation 4 to section 115JB, MAT provisions do not apply to foreign companies meeting specific criteria regarding residency and permanent establishment in India. Further, Explanation 4A exempts foreign companies whose income arises from certain specified businesses taxed at specified rates.
MAT Credit:
When a company pays tax under MAT, it can claim Minimum Alternate Tax Credit under section 115JAA. This credit allows the company to offset taxes paid as MAT against its regular tax liability under the Income Tax Act.
The allowable tax credit is the amount paid as per MAT calculation, which equals the income tax payable under the regular provisions of the Income Tax Act. However, no interest is paid by the department on this tax credit.
MAT Credit provides relief to companies by ensuring that taxes paid under MAT are not an additional financial burden but rather an adjustment against future tax liabilities, promoting fairness and equity in taxation.
Understanding the Carry Forward Mechanism for MAT Credit under Current Tax Regulations
Under the prevailing income tax framework, a carry forward mechanism for Minimum Alternate Tax (MAT) credit is available to taxpayers. This provision allows businesses to utilize MAT credit in any assessment year where their regular income tax liability exceeds the MAT payable for that year.
It is important to note that the MAT credit claimed cannot surpass the differential amount between the regular tax liability and the MAT liability for the specific year in which the credit is being applied. This ensures that the credit is used proportionately and only to the extent of the tax benefit actually realizable.
Taxpayers are allowed to carry forward MAT credit—representing the excess of MAT paid over the regular tax liability—for up to 15 assessment years from the year in which the credit is first generated.
Important Consideration:
It is essential to note that no interest is payable to the taxpayer on the MAT credit amount during the carry forward period. This credit merely offsets future tax liabilities and does not accrue any financial return over time.
Frequently Asked Questions
1. What is Minimum Alternate Tax (MAT)?
Answer: MAT is a provision under Section 115JB of the Income Tax Act that ensures companies with high book profits but low taxable income pay a minimum tax of 15% on book profits, plus surcharge and cess, to prevent tax avoidance.
2. Which entities are required to pay MAT?
Answer: All companies, including foreign companies with a permanent establishment (PE) in India, must pay MAT if their tax liability under normal provisions is lower than MAT, unless specifically exempt.
3. What is the current MAT rate applicable to companies?
Answer: From Assessment Year 2020–21 onwards, MAT is levied at 15% of book profit plus applicable surcharge and health & education cess.
4. Is MAT applicable even if a company reports a tax loss under regular provisions?
Answer: Yes. If a company has positive book profits as per its financial statements but a loss or low income under regular tax provisions, MAT still applies.
5. How is ‘book profit’ calculated for MAT purposes?
Answer: Book profit is derived from the net profit as per the Profit & Loss Account, prepared under the Companies Act, adjusted by specified additions and deductions as per Explanation 1 to Section 115JB.
6. Are any companies exempt from MAT provisions?
Answer: Yes. Exemptions include:
- Domestic companies opting for Section 115BAA/115BAB
- Companies in life insurance business (Section 115B)
- Shipping companies under tonnage tax
- Certain foreign companies with no PE or having specific income taxed at special rates.
7. What is MAT Credit and how does it work?
Answer: When MAT paid exceeds the regular tax liability, the excess is allowed as MAT Credit under Section 115JAA. It can be carried forward for up to 15 assessment years and used to offset future regular tax liabilities.
8. When can MAT Credit be utilized?
Answer: MAT Credit can be set off only in years where regular income tax exceeds MAT. The credit utilized cannot exceed the difference between regular tax and MAT for that year.
9. Is any interest paid on unutilized MAT Credit?
Answer: No interest is payable on MAT Credit by the Income Tax Department, even during the 15-year carry forward period.
10. Is MAT applicable to LLPs, partnerships, or sole proprietorships?
Answer: No. MAT applies only to companies. LLPs and other non-corporate entities are subject to Alternate Minimum Tax (AMT) under Section 115JC, not MAT.
Read More: Who should file Schedule AL (Assets and Liabilities) in ITR?
Web Stories: Who should file Schedule AL (Assets and Liabilities) in ITR?
Official Income Tax Return filing website: https://incometaxindia.gov.in/
