Income tax act is such an enactment where the person who earns income have to pay tax to the government. Based on various committee recommendations and considering practical situations as well inflation, economic development the government provides minimum exemption limit and various slabs of taxation. It is normal that the assessee can claim deduction for expenses incurred to generate the income.
Corporations take advantage of various provisions of the Income Tax Act by claiming exemptions, deductions, depreciation, etc. to reduce their tax liability. One such provision available to companies for deducting their corporate tax burden is their Minimum Alternate Tax (MAT). It is introduced by Finance Act, 1996 to ensure that companies pay a minimum amount of tax to the government. Let us try to understand different aspects of Minimum Alternate Tax.
What is MAT?
MAT or Minimum Alternate Tax is a provision in Direct tax laws to limit tax exemptions availed by companies, so that they mandatorily pay a minimum amount of tax to the government. As per Section 115JB, all companies are required to pay corporate tax at least equal to the higher of the following:
Normal Tax Liability: Calculated as per the normal provisions of the Income Tax Act, i.e. by applying the relevant tax rate to the taxable income of the company.
Minimum Alternate Tax (MAT): For FY 2019-20, tax payable is computed at 15% (previously 18.5%) on book profit plus applicable cess and surcharge.
NOTE: MAT is levied at the lower rate of 9% (plus surcharge and cess, as applicable) for companies that are a unit of an International Financial Services Centre and derive their income solely in convertible foreign exchange.
MAT incidence
Private or public irrespective of whether Indian or foreign are liable to pay MAT, if the income tax payable (including cess and surcharge) as per the provisions of Income Tax Act is less than 15% of the book profit plus cess and surcharge.
Exceptions from MAT
MAT is not applicable to any income received by a company from life insurance business and also from shipping income liable to tonnage taxation. This is because the tonnage system of taxation is covered under Sections 115V to 115VZC of the Income Tax Act, 1961.
As per tax amendments made in the Finance Act 2016 with retrospective effect from 1st April 2001, MAT will not be applicable to a foreign company if:
the company (assessee) is from a specific country or territory with which the Indian government has an agreement as per Section 90 (1) or the company does not have a permanent establishment in the country as agreed to the Central Government as per Section 90A(1) and
the company (assessee) which does not have the above agreement and is further not required to seek registration under any law for the time being in force relating to companies
As per section 115JB(4A), MAT provisions are not applicable to a foreign company whose total income comprises profits and gains arising from businesses referred to in sections 44AB, 44BB, 44BBA or 44BBB of the income tax Act.
Calculation of MAT
MAT is calculated as 15% of the book profit of the tax assesse. Under existing rules, book profit is calculated as per Section 115JB of the Income Tax Act, 1961.
Example:
The taxable income of XYZ Company, not availing any tax exemptions/incentives, as per the provisions of the Income Tax Act, 1961 is Rs. 10 lakh. Thus, the normal tax liability of this company at the rate of 22% corporate tax will be Rs. 2.2 lakh plus cess and surcharge.
On the other hand, the book profit of this company as per Section 115JB is Rs. 20 lakh. Thus, MAT at the rate of 15% of book profit will be Rs. 3 lakh plus cess and surcharge.
Since, MAT is higher than the normal tax liability, the company will be liable to pay Rs. 3 lakh (plus cess and surcharge) as MAT and not Rs. 2.2 lakh (plus cess and surcharge).
How is Book profit calculated?
As per Section 115JB (2), book profit means net profit in the statement of profit and loss prepared in accordance with Schedule III of the Companies Act, 2013. A number of costs/income are considered along with the profit and loss statement when calculating the book profit of a company. The following are some of the major ones:
Key Additions to Book Profit
The following will be added to arrive at the book profit amount if they are debited to the statement of profit and loss.
Income-tax paid/payable and the provision thereof
Amounts carried to any reserves except those specified under Section 33AC
Provisions for unascertained liabilities
Provisions for losses of subsidiary companies
Dividends paid/proposed
Expenditure related to incomes which are exempt under Sections 10, 11 and 12 but excluding those under Section 10(38)
Income of an individual derived from the association of persons (AOP) or body of individuals (BOI) on which no income-tax is payable in accordance with the provisions of section 86.
Key Deductions to book profit
The following deductions are applicable if they are credited to the statement of profit and loss:
Amount withdrawn from any reserve or provisions
Incomes which are exempt under sections 10, 11 and12, but excluding those under section10(38)
Amount of depreciation debited to statement of profit and loss (excluding the depreciation on revaluation of assets)
Amount withdrawn from revaluation reserve to the extent it does not exceed the amount of depreciation on revaluation of assets
Income of an individual derived from the AOP or BOI on which no income-tax is payable in accordance with the provisions of section 86.
The book profit computed as per provisions of section 115JB should be certified by a chartered accountant in Form no. 29B. The certification report should be obtained on or before the due date of ITR filing to avoid any penalties.
What is MAT Credit?
As discussed earlier, a company is liable to pay the higher of the normal tax liability (calculated on the total taxable income) and MAT (calculated on book profit). When MAT for a company is greater than its normal tax liability, the difference between the MAT and normal tax liability is called MAT Credit.
For example:
Tax liability of a company for FY 2019-20 under normal provisions of the Income Tax Act is Rs. 8 lakh while the liability as per the provisions of MAT is Rs. 8.4 lakh. In this case, MAT is higher than the normal tax liability hence the company is eligible for MAT Credit as per Section 115JAA.
Amount of MAT credit = MAT – Normal Tax Liability
= Rs. 8.4 lakh – Rs. 8 lakh
= Rs. 40,000
Carry Forward Mechanism for MAT Credit
A carry forward mechanism for minimum alternate tax credit is currently in effect as per current income tax rules. Currently credit of MAT can be claimed in the assessment year in which the normal tax liability is greater than the MAT liability. Note that the maximum amount of MAT credit that you can claim cannot exceed the difference between the normal tax liability and the MAT liability of the year for which MAT credit is being availed.
For example:
Suppose a company has MAT credit of Rs. 2 lakh. Additional also suppose that tax liability of the company for FY 2019-20 under normal provisions of Income Tax Act is Rs. 10.5 lakh and the liability as per the provisions of MAT is Rs. 10 lakh. Since the normal tax liability is more than the MAT liability, MAT credit can be claimed in this situation.
Additionally, the maximum MAT credit that can be claimed in this case is Rs. 50,000 (difference between the normal tax liability and MAT). Hence, in this case, out of the total MAT credit of Rs. 2 lakh, the company can claim only Rs. 50,000 for FY 2019-20, and the balance credit of Rs. 1.5 lakh will be carried forward to subsequent year(s).
Carry Forward Period for MAT Credit
MAT credit that is equivalent to the tax paid in excess of MAT over normal tax liability can be carried forward up to a period of 15 assessment years from the year MAT credit was generated.
NOTE: No interest is paid to a taxpayer on such MAT Credit.
Frequently Asked Questions (FAQs)
Q1. What is MAT?
Ans. MAT or Minimum Alternate Tax is a provision in Direct tax laws to limit tax exemptions availed by companies, so that they pay at least a minimum amount of corporate tax to the government. The key reason for introduction of MAT is to ensure minimum levels of taxation for all domestic and foreign companies in India. The present MAT rate as of FY 2019-20 is 15% of book profit (previously 18.5%) plus applicable cess and surcharge.
Q2. How is MAT calculated?
Ans. MAT is calculated at 15% of the book profit as per Section 115JB of Income Tax Act, 1961. All companies are required to pay corporate tax based on which is higher of the following:
Normal Tax Liability: Tax computed as per the normal provisions of the Income-tax Law, i.e., by applying the relevant tax rate to the taxable income of the company.
Minimum Alternate Tax (MAT): Tax computed at 15% (previously 18.5%) on book profit plus cess and surcharge.
Q3. What is MAT credit?
Ans.When the amount of minimum alternate tax (MAT) for a company is greater than its normal tax liability, the difference between MAT and normal tax liability is called MAT Credit.
For example:
Tax liability of a company for FY 2019-20 under normal provisions of the Income Tax Act is Rs. 8 lakh while the liability as per the provisions of MAT is Rs. 8.4 lakh. In this case, MAT is higher than the normal tax liability, and hence the company is eligible for MAT Credit as per Section 115JAA.
Amount of MAT credit = MAT – Normal tax liability
= Rs. 8.4 lakh – Rs. 8 lakh
= Rs. 40,000
Q4. When can you claim MAT credit?
Ans. When the normal tax liability (calculated on the total taxable income) for a particular year is greater than the minimum alternate tax (calculated on book profit), MAT credit can be claimed.
For example: Tax liability of a company for FY 2019-20 under the normal provisions of Income Tax Act is Rs. 10.5 lakh and the liability as per the provisions of MAT is Rs. 10 lakh. In this case, the normal tax liability is greater than MAT and hence MAT credit can be claimed.
Q5. What is the maximum amount of MAT credit that can be claimed?
And. The maximum amount of MAT credit that you can claim cannot exceed the difference between the normal tax liability and the MAT liability in the year for which the MAT credit is being availed.
For example: If a company has MAT credit of Rs. 1 lakh., the tax liability as per the normal provisions for FY 2019-20 is Rs. 10 lakh while that as per the MAT provisions is Rs. 9.8 lakh. Hence, the maximum amount of MAT credit that can be claimed for FY 2019-20 is Rs. 20,000 only. The rest Rs. 80,000 will be carried forward.
Q6. For how long can MAT credit be carried forward?
Ans. MAT credit can be carried forward up to a period of 15 assessment years from the year in which MAT credit was generated.
Q7. Is surcharge applicable on MAT?
Ans. Yes, both surcharge and cess are applicable when total tax paid is calculated on MAT.
Q8. Which companies are subject to pay MAT?
Ans. Almost all companies whether private or public, whether Indian or foreign are liable to pay MAT, if the payable income tax (including cess and surcharge) as per the provisions of Income Tax Act is less than 15% of the book profit plus cess and surcharge.
Q9. Is MAT applicable on dividend income?
Ans. Dividend income from domestic companies is exempt from tax, provided that the dividend received is less than Rs. 10 lakh for the applicable FY. Hence, dividend income up to Rs. 10 lakh will not attract MAT.
Q10. What does report from chartered accountant with respect to book profit calculation mean?
Ans. The book profit computed as per provisions of section 115JB should be certified by a chartered accountant in Form no. 29B. The certification report should be obtained on or before the due date of ITR filing to avoid any penalties.