Different types of taxes are levied by the government of India from individuals as well as companies. The Indian government is continuously striving to make the tax-payers spectrum broader and to ensure that no individual or company that is earning a substantial profit gets to avoid payment of income tax. All such taxes payable by entities fall under either the direct tax category or the indirect tax category. Minimum Alternate Tax (MAT) is a tax payable by companies and falls under the indirect tax category. Let us look at the definition and some of the most prominent traits of this tax.
What is Minimum Alternate Tax or MAT?
Under the provisions of the Minimum Alternate Tax Act, as per section 115JB, every company domestic or foreign is required to pay MAT. The rule was put to practice so as to ensure that no taxpayer with substantial economic income gets to avoid significant tax liability on account of various exclusions, deductions and credits. MAT is a tax levied under Income Tax Act of India, 1961.
There are several “zero tax companies” that book high profit but pay almost nil taxes by rolling out substantial dividends to their shareholders. This nil tax comes as a result of various exemptions, deductions and incentives provided to them due to several conditions that they meet. However, the aim of MAT is to ensure that no company which has the ability to pay taxes, gets to avoid payment of income tax.
Eligibility for Payment of Minimum Alternate Tax or MAT:
The payment of Minimum Alternate Tax or MAT is only to be done by companies and this taxation concept is not applicable to individuals, HUFs, partnership firms etc. The rules pertaining to section 115JA are applicable to foreign companies that derive profits as a result of operations in India.
Features and Provisions of the Current MAT Regime:
Listed below are some of the most unique and significant features of Minimum Alternate Tax or MAT.
Advance Payment of Tax:
Under the Income Tax Act, 1961, every taxpayer is required to pay tax in advance as computed in accordance with, if the tax liability is Rs.10,000 or more for a particular financial year. Similarly, all companies are liable for payment of advance tax under section 115JB of the Income Tax Act.
Any company that pays minimum alternate tax under the MAT clause instead of regular tax, then if the tax paid is more than that accrued, the excess amount is credited back as tax credit to the company. Thus, MAT credit can be understood as the difference between the tax calculated under the general provisions of the Income Tax Act and that calculated under the MAT provisions of the Act. Such excess of tax credit is allowed to be carried forward and set off in the financial year in which the company is liable to pay tax under the general provisions of the Income Tax Act. This MAT credit can be carried forward and set-off for 10 consecutive assessment years succeeding the year in which the tax credit first accrued.
Suppose a company ABC books a profit of RS.8 lac. After claiming all applicable deductions, exemptions and depreciation, the gross taxable income comes out to be Rs.4 lac.
Income tax applicable in this case will be = 30% of Rs.4 lac = Rs.1,20,000
However, applicable MAT = 18.5% of Rs.8 lac = Rs. 1,48,000
So excess tax payable will be Rs.1,48,000 – Rs. 1,20,000 = Rs.28,000
This excess Rs.28,000 can be carried forward and set-off against regular tax payable in future.
All companies that are liable to pay MAT have to furnish a MAT report as prescribed in Form 29B. This report has to be submitted along with the ROI filed.
MAT Applicability in Special Economic Zones (SEZs):
Initially when the MAT was rolled by the government, MAT directives did not apply to profit earned by any company via operations and business activities in Special Economic Zones or SEZs. However, in the year 2011, the law was modified to include all such companies operating in SEZs and earning profit from business there, under the Section 115JB for MAT payment.
Future of Minimum Alternate Tax, MAT, in India:
Due to the nature of MAT, government has been facing continuous heat and several suggestions of amendments to make section 115JB more inclusive as well as flexible. The Indian government has recently announced the formation of a special committee to examine ways to resolve disputes arising over MAT payment. At present the scope of the committee is limited and seems to be focused on resolution of MAT demands placed by the government on foreign institutional investors. This is because over the past few months several foreign investors have received notices with regards to payment of MAT. However, efforts by the government are still on to make MAT payment more holistic and controlled.
News About Minimum Alternate Tax
CBDT Issues Notification Pertaining to Foreign Tax Credit Rules
The Central Board of Direct Taxes (CBDT) has published rules that permit Indian taxpayers to claim credit of foreign tax under dispute which also includes cess and surcharge paid abroad. Such tax payments can be claimed as credit under the Foreign Tax Credit (FTC) rule after settlement of the dispute.
Scheduled to come into effect from 1st April, 2016, the FTC also includes MAT (Minimum Alternate Tax) and excludes penalty, interest or fees. In order to claim the credit under the new rules, the taxpayer is required to produce supporting documents pertaining to payment of foreign taxes and settlement of the dispute. No refund shall be claimed by the taxpayer on the credit, directly or indirectly. Such claimants will be required to file income statement from the foreign location accompanied by Form 67 for tax paid details.
4th July 2016
Good News for Individuals with Overseas Income!
Corporates and individuals with overseas income can now heave a sigh of relief as the Central Board of Direct Taxes issued some new guidelines on Monday which will prove to be beneficial to those concerned. According to the draft guidelines issued, Indian taxpayers can now claim foreign tax credit against their domestic tax, cess and surcharge liability. The CBDT also suggested that Indian taxpayers should offset overseas taxes against their minimum alternate tax liability.
20th April 2016
Minimum Alternate Tax to have the curtain drop with the Finance Bill coming soon
The this month-end is expected to bring in the much awaited Finance Bill, which is also expected to bring a closing call to the minimum alternate tax. MAT was applied to corporate FPIs, which eventually even taxed long term capital gains. The issues was thoroughly discussed and examined and recommended that MAT was applicable for FPIs.The Dispute Resolution Panel has ordered that the levy of MAT on FPIs be withdrawn.
14th March 2016
Minimum Alternate Tax to be Removed, FPIs Relieved
The minimum alternate tax is expected to be disclosed by the end of this month with the Finance Bill. Most Foreign Portfolio Investors or FPIs will be relieved with this news. Since last year, March 2015, the FPIs were asked to pay the minimum alternate tax or MAT. This has been introduced long ago to tax companies paying zero tax paying dividends. MAT provisions were applied to FPI corporates that were also taxing long term capital gains. The Dispute Resolution Panel, has ordered the withdrawal of the MAT levy on FPIs, making it evident that the government has decided to implement a stable and predictable tax.
25th February 2016