Introduction

Minimum Alternate Tax (MAT) is a tax provision under the Indian Income Tax Act, designed to ensure that companies, especially those with substantial book profits but low or no taxable income, contribute a minimum amount towards the nation’s tax revenues. It prevents corporations from using tax exemptions, deductions, and loopholes to avoid paying taxes altogether. MAT guarantees that even if a company’s tax liability under normal provisions is lower than a prescribed percentage of its book profits, it still pays a minimum level of tax.

In India, MAT was introduced by the Finance Act of 1987 and is governed under Section 115JB of the Income Tax Act, 1961. It primarily applies to domestic companies and, under certain conditions, to foreign companies with a Permanent Establishment (PE) in India.

What is MAT?

MAT ensures that a company pays at least a minimum amount of tax, based on its book profits, irrespective of its taxable income. It applies when the regular tax calculation results in a lower tax than what is calculated under MAT provisions. MAT is intended to cover cases where companies are able to reduce or eliminate their tax liabilities through various exemptions, deductions, or tax planning strategies.

Who is Subject to MAT?

MAT applies to domestic companies as well as foreign companies with a PE in India. Specifically:

1. Domestic Companies: A domestic company is subject to MAT if its tax liability under normal provisions (based on its taxable income) is lower than 15% of its adjusted book profits.

2. Foreign Companies: Foreign companies operating in India are also subject to MAT, but only if they have a Permanent Establishment (PE) in India. If a foreign company does not have a PE, it is not subject to MAT.

Calculation of MAT

MAT is calculated as a percentage of a company’s book profits. The steps for calculating MAT are as follows:

• Determine Book Profits: Book profits are derived from the company’s financial statements, specifically the Profit & Loss account. The following adjustments are made to the book profit (Net Profit) for MAT calculation:

  (A) Additions to the Net Profit (If recorded in the Profit and Loss Account):

  1. Income Tax Paid or Payable: The income tax calculated as per the normal provisions of the Income Tax Act.
  2. Transfer to Reserves: Any amounts transferred to reserves, such as a general reserve.
  3. Dividends: Dividends that are proposed or paid out by the company.
  4. Losses of Subsidiary Companies: Provision for the loss of subsidiary companies.
  5. Depreciation: This includes regular depreciation and depreciation on assets that have been revalued.
  6. Deferred Tax: Any amount related to deferred tax, such as provision for future tax liabilities.
  7. Provisions for Uncertain Liabilities: This includes provisions like bad debts or other similar provisions.
  8. Exempt Income Expenses: Expenses related to exempt income under sections 10, 11, and 12 (except for sections 10AA and 10(38)). This means income under section 10AA or long-term capital gains exempt under section 10(38) is still subject to MAT.

  (b) Deletions to the Net Profit (If recorded in the Profit and Loss Account):

  1. Withdrawal from Reserves or Provisions: Any amounts taken out of reserves or provisions that were previously recorded.
  2. Exempt Income: Any income covered under sections 10, 11, and 12 (except for sections 10AA and 10(38)).
  3. Withdrawal from Revaluation Reserve: Any amount taken out from the revaluation reserve and credited to the Profit and Loss account, but only to the extent of depreciation caused by asset revaluation.
  4. Losses or Unabsorbed Depreciation: If there are any carried forward losses or unabsorbed depreciation, the smaller of the two can be subtracted. However, depreciation loss doesn’t apply here.
  5. Deferred Tax Credit: If deferred tax is credited in the Profit and Loss account, it should be deducted.
  6. Depreciation (Excluding Revaluation Depreciation): The regular depreciation amount charged to the Profit and Loss Account, but excluding depreciation related to revaluation of assets.

  This breakdown simplifies how certain items are adjusted when calculating MAT, based on the company’s book profits.

           Once the adjusted book profits are determined, the tax liability is calculated based on the MAT rate.

• MAT Rate: For the financial year 2023-24, the MAT rate is 15% of the adjusted book profits.

• Surcharge on MAT is dependent on the total income of the company.  For companies with a total income up to ₹1 crore:
  No surcharge is applicable. 2. For companies with a total income exceeding ₹1 crore but up to ₹10 crore: A 7% (2% for Foreign Co.) surcharge on MAT is levied. 3. For companies with a total income exceeding ₹10 crore: A 12% (5% for Foreign Co.) surcharge on MAT is levied.

• Cess: health & education cess (currently 4%) is added to the total.

  Example of MAT Calculation:

  • Book profits of a company: ₹10,00,000
  • MAT rate: 15%
  • MAT Calculation: ₹10,00,000 × 15% = ₹1,50,000
  • Surcharge (if applicable): Let’s assume a surcharge of 7% is applicable.
  • Total MAT Liability (with surcharge): ₹1,50,000 + (₹1,50,000 × 7%) = ₹1,50,000 + ₹10,500 = ₹1,60,500
  • Health & Education Cess (4%): ₹1,60,500 × 4% = ₹6,420
  • Final MAT Liability: ₹1,60,500 + ₹6,420 = ₹1,66,920

When is MAT Applicable?

MAT is applicable when the company’s tax payable under the regular provisions is lower than the minimum tax calculated based on its book profits. For example, if a company has substantial tax exemptions or deductions (such as under Section 80G, 80-IA, or depreciation benefits), its taxable income may be reduced to a negligible or zero amount. In such cases, the company would still be required to pay MAT, ensuring that it contributes to the tax base at a minimum rate.

For Details on Corporate Tax Click Here Taxation of Domestic vs. Foreign Companies in India

Key Features of MAT

1. Alternative to Regular Taxation: MAT acts as a backup tax mechanism, ensuring companies with substantial book profits contribute a fair share to the country’s revenue, even if they qualify for exemptions that reduce their taxable income.

2. Lower Compliance Burden for Small Taxpayers: Smaller companies that do not use aggressive tax planning strategies or benefit from tax exemptions typically pay their regular tax liabilities, which may exceed their MAT liability.

3. MAT Credit: One of the key features of MAT is that companies that are subjected to MAT can carry forward the excess MAT paid over their regular tax liability as MAT credit. This credit can be carried forward for 15 years and set off against future tax liabilities, provided their regular tax liability exceeds the MAT calculation in future years.

4. Peaks During Loss Years: MAT is particularly useful in years when a company incurs losses or negligible taxable income, as it guarantees a minimum tax payment based on book profits.

MAT Credit:

The provision for MAT credit allows companies to offset the MAT paid in one year against future tax liabilities. If a company’s regular tax liability in subsequent years exceeds its MAT liability, the company can use the MAT credit to reduce its tax burden. MAT credit can be carried forward for up to 15 years.

For example:

• If a company pays MAT in a year when its regular tax liability is lower, and in subsequent years its tax liability exceeds the MAT liability, the company can set off the excess MAT paid against future taxes. This ensures that the company does not lose the benefit of having paid MAT in previous years.

MAT for Foreign Companies

Foreign companies with a Permanent Establishment (PE) in India are also subject to MAT, similar to domestic companies. The book profits of a foreign company with a PE are subject to the same MAT provisions, including adjustments to the profits and the MAT rate of 15%. However, foreign companies without a PE in India are not subject to MAT.

Conclusion

Minimum Alternate Tax (MAT) serves as a safeguard to ensure that companies contribute to tax revenues, even when they benefit from various exemptions, deductions, or tax planning strategies. By taxing book profits, MAT ensures that companies with substantial profits pay a minimum amount of tax, thus ensuring fairness in the tax system.

Companies can also take advantage of the MAT credit to offset the taxes paid under MAT in subsequent years when their regular tax liabilities exceed the MAT liability. MAT plays a crucial role in preventing tax avoidance and ensuring a fair distribution of tax liability among all companies operating in India.

The introduction of MAT has brought a significant shift in corporate taxation in India, ensuring that tax-paying companies contribute a minimum level of tax to the government, even if their regular tax liabilities are low due to tax exemptions. It provides an additional layer of transparency and fairness in the taxation system for both domestic and foreign companies with a PE in India.