Minimum Alternate Tax – MAT
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 computed under MAT provisions at a rate of 15% 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 18.5% (reduced to 15% from Assessment Year 2020-21) of book profits, which includes surcharge and cess if applicable. 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.
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Official Income Tax Return filing website: https://incometaxindia.gov.in/
