Minimum Alternate Tax (MAT)

Minimum Alternate Tax is the tax paid by all the companies that come under the indirect tax category. This tax came into play to ensure that none of the taxpayers with a good amount of income get to avoid tax liability due to any exclusions.

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.

For Example:

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.

  1. Advance Payment of Tax:
  2. 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.

  3. MAT Credit:

  4. 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.

    Example:

    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.

  5. MAT Report
  6. 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.

  7. 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.

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