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minimum alternate tax (mat)

MAT – Minimum Alternate Tax

Last Update Date : August 11, 2018

Minimum alternate tax - MAT calculation

Companies find several means of escape for paying income taxes by using different types of exemptions or deductions. Introduction of MAT in the income tax act has brought tax to all the profit making companies, who were paying less or minimum taxes by taking advantage of certain exemptions and deductions. Now, they have to pay a bare minimum tax on their book profit irrespective of the fact that their tax under normal provision is lower or nil. This guide will give you a better understanding of MAT Concept.

What is MAT?

MAT stands for Minimum Alternate Tax or Minimum Alternative Tax. The concept of MAT in simple words is a tax payable under the Income Tax Act. The goal behind the introduction of MAT was  to target organisations/companies who were making higher profits and paying dividends to their shareholders, but paying nil, less or the minimum tax by availing of  several exemptions, deductions, incentive and benefits, under the income tax laws/rules. To make such companies pay certain minimum tax, MAT was introduced, which now applies to all applicable companies.

Objective of Minimum Alternate Tax Section 115JB

With the introduction of MAT u/s115JB,  has ensured that no company can avoid paying taxes for their income earned. As they have different provisions for allowable expenses for both The Company Act and Income Tax Act, the primary objective behind MAT is to collect taxes from all the Zero tax companies.
Zero tax companies are companies who show higher book of profits and pay out dividends to their shareholders but not paying taxes.

MAT Applicability

MAT is applicable to Companies; Domestic and Foreign.  MAT is levied on all corporate entities. Foreign companies with Indian income source .. Though individuals, HUFs, Partnership firms, etc. are excluded from applicability of MAT, they are now subjected to Alternate Minimum Tax (AMT) u/s 115JC. Income from charitable activities are excluded under MAT. Companies dealing with infrastructure and power sectors are also excluded.

What is MAT Credit?

MAT is the difference between the tax calculated under normal provisions and the tax calculated under the MAT provisions of the Act. The difference (excess tax paid) under the normal provisions of the income tax act  can be claimed in the subsequent years in which the company is subject to normal tax rate which is higher than MAT.

MAT Calculation for AY 2018-19 with Example

For example In XYZ CompanyTaxable income as per regular / normal provisions of Income Tax Act is Rs 40 lakh and books a profit of Rs. 75 lakh for the FY 2016-2017.

Lets calculate the taxes in both the provisions:

  1. Tax as per normal provision:
    INR 40,00,000 * 25% + 3% = 10,30,000
  2. Tax as per MAT provision:
    INR 75,00,000 * 18.5% + 3% = 14,29,125

Hence Tax payable by the XYZ Company will be INR 14,29,125.

MAT Credit will be:  MAT = 14,29,125 – 10,30,000= INR 3,99,125

MAT paid can be carried forward and set off against normal provisions for subsequent 10 years, provided accordingly if certain conditions are satisfied. Tax credit can also be carried forward for subsequent 10 assessment years.

For example: if excess tax is paid for FY 2016-2017, then the credit that can be carried in FY 2017-2018.

Let’s refer to an example given below to understand more about carry forward MAT Credit

Assessment Year Tax as per MAT Provisions Tax as per Normal Provisions MAT Credit

Set off

Tax

Payable

Carry Forwarded MAT Credit
2011-2012 3000 3500 NIL 3500 NIL
2012-2013 3500 3100 NIL 3500 400
2013-2014 2000 3100 -400 3100 NIL

With the Introduction of MAT, all companies came under one umbrella to pay minimum alternate tax. So, there are no reasons to stop companies from paying MAT apart from exceptions like power and infrastructure sectors, etc.

Basic Provisions of MAT

Since the introduction of MAT, few changes have been made to it. MAT is now levied on all companies subject to a few exceptions, as per the provisions u/s 115JB.

  • With introduction of the section 115JB by the Finance Act taxes were levied on book of profits.
  • First the tax liability is computed by applying the normal provisions of the income tax act and normal tax rate applicable to the category of the company
  • Tax computed @ 18.5% (plus surcharge and cess as applicable) on book profit (manner of computation of book profit is discussed in later part). The tax computed by applying 18.5% (plus surcharge and cess as applicable) on book profit is called MAT.
  • If the tax calculated as per the normal provisions is lesser than the tax calculated under MAT provisions, then the company has to pay the tax under MAT.

Book Profit Calculation

Book of profit is the net profit shown in the statement (P&L account) for the financial year, calculated in accordance with the Companies Act, which is increased and decreased by the below as follows:

Inclusions to net profit:

  • If calculated, income tax paid or payable as per the normal provisions of Income Tax Act.
  • Amount shifted to any reserve.
  • Amount of cost on expenses relating to exemption income u/s 10 (except u/s 10(38)).
  • Dividends paid or proposed.
  • Provision for losses of subsidiary (if loss).
  • Provision of deferred tax.
  • Provision or amount of depreciation.
  • Provision of bad debts.

Exclusions to net profit:

  • Amount withdrawn from any reserve
  • Amount of income relating to exemption income u/s 10 (except u/s 10(38))
  • Deferred amount of tax, if any
  • Amount of depreciation debited to profit and loss account
  • Amount of loss brought forward

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