Minimum alternate tax (MAT) made every company pay tax in India!

In India, tax is one of the most crucial revenues for the government to cater to nearly 1.4 billion. However, the people and the entities in the nation lack regular tax-paying behaviour. Companies with sound financial health try either minimising or eliminating the tax payment. Using different deductions and exemptions, the company’s level down their tax liability. 

However, the government regulates this practice by applying a minimum alternate tax on the book profit of the company. Read the article to understand the meaning and calculation of minimum alternate tax (MAT).

What is the Minimum Alternate Tax (MAT)?

The government earns its revenue from imposing taxes on goods/services (indirect) and income earned (direct taxes). Corporate tax paid by the companies operating in India is one such direct tax which forms a significant part of these revenues. 

During the 1980s, India experienced a huge surge in ‘zero tax’ companies. The companies, having sufficient profits in their balance sheets but not paying a single penny of tax are known as ‘zero tax’ companies. This was possible as the calculation of the profit of a company differs by the laws governing it. 

• Company’s Act, 2013 (regular financial statements of a company)
• Income Tax Act, 1961 (profit after exemptions and deductions)

To eradicate this problem, for the first time, the government introduced minimum alternate tax (MAT) in the Finance Act, 1987. However, it was not very successful and needed some amendments. So, it was re-introduced in 1996. 

The minimum alternate tax (MAT) applies to all companies in India, except life insurance companies, Special Economic Zone (SEZ) units and certain foreign companies. This ensures that all the companies with sound financial position, pay tax.

As a solution for the dilemma regarding the correct taxable profit of companies, the MAT applies to the book profit. This book profit is calculated by adjusting the balance sheet items such as depreciation and finance cost (which usually act as a tax shield). Moreover, the exemptions and deductions of gross taxable income are also adjusted.

Must read: How to do tax planning for high-income earners?

Eligibility for MAT

As per section 115JB, Income Tax Act, 1961, minimum alternate tax (MAT) applicability is restrained to the following conditions:

• The company should be operating in India.
• It will not include individuals or Hindu undivided families (HUF).
• Not applicable to companies granted an exemption under section 10AA of the Income Tax Act, 1961 (companies in SEZ).

The rates applicable for the calculation of MAT are as per the following conditions:

• The base rate is 15% for the companies.
• The base rate is 9% for companies in the International Finance Service Centre.
• The surcharge is 10% for companies with taxable income of more than 1 crore.
• The effective tax rate is after accounting for surcharge and cess.

Also, know about: Refund 101: A guide to growing your income tax returns refund.

Let us understand with an example

The MAT calculation seems complex, but this example would simplify the concept.

Let’s assume, a company has a net profit of ₹10 crore in its balance sheet. To ascertain the book profit, some adjustments are made by adding back the following items:

• Income tax paid or payable
• Depreciation
• Loss of sale of assets
• Dividends paid to shareholders
• Some provisions related to liabilities

Also, some exemptions, deductions, and dividend distribution tax are adjusted. 

Due to these treatments, let’s say that the book profit for the company is ₹8.5 crores.

Now, the regular tax liability and minimum alternate tax liability would be calculated as follows:

The company will pay the higher amount between regular tax liability and MAT liability. Here, the company will pay a regular tax liability of ₹3 crores.

In addition, companies are allowed to square off their MAT liability (in the next year) against the previous year’s regular tax liability.

Also, know about: Perquisites in income tax

Bottomline

The minimum alternate tax in India is a crucial instrument to combat the ‘zero tax’ companies. During the 1980’s, the profits of some famous companies were touching the sky. Yet the irony was that they paid no tax on this profit as the calculation of profit as per Income Tax was different. So, the applicability of MAT altered the functioning of such companies.

The Finance Act holds the power to make the amendments in the function of MAT. The professionals try to reduce tax liability as low as possible. However, the minimum alternate tax meaning doesn’t allow them to escape from it.

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