Minimum Alternate Tax: What is it and How to Calculate it

The Indian Government, in 1988, introduced Minimum Alternate Tax (MAT) to ensure that no company avoided paying tax to the government. All zero-tax paying firms must pay the government a specific percentage of their total book profit as taxable income.

 

Several amendments have been made since the introduction of MAT, which is currently levied on companies under Section 115JB.

Your company as a taxpayer is liable to pay taxes under the below situations, whichever may be deemed higher:

• Tax Calculations According to the Normal Provisions of the Income Tax Act

According to the regular provisions, companies need to pay a tax rate of 30% plus 4% education cess plus surcharge, if it’s applicable. For domestic companies whose turnover receipts touch the mark of ₹400 Crores, the tax liabilities are 25% plus 4% cess plus surcharge, if it’s applicable.

• Tax Calculations According to the MAT Provisions u/s 115JB 

The taxation rate is 15% of book profits plus 4% education cess plus a surcharge, if it’s applicable, with effect from 2020-21. Before FY 2019-20, the rate for MAT tax was 18.5%.

 

Additionally, if your company is part of an International Financial Services Centre, earning its income in foreign exchange, which is convertible, 9% MAT is levied.

Now that you have understood what is MAT and its provisions, you need to know about MAT calculation. The company needs to calculate the taxation liability according to normal provisions under the Income Tax Act, 1961. 

 

Then, they need to compare it with the tax computed at 15% (plus surcharge and cess, if applicable) on the book profit. The company needs to pay the highest liability after the comparison.

 

To understand it better, consider a hypothetical MAT calculation example. Suppose the book profit of your company is ₹100 Crores. In this case, you need to pay at least ₹15 Crores as tax, according to the MAT rate, which is 15%. 

 

If the regular tax liability is ₹10 Crores after deductions, it is less than the MAT rate of 15%. In this case, you need to pay ₹15 Crores as MAT to the government.

Book profit refers to the net profit a company earns for a particular year according to the profit and loss account. It is calculated according to the Companies Act 2013 guidelines. 

 

There are two types of adjustments, positive adjustments and negative adjustments, on which the book profit depends. Here are a few positive adjustments:

• Income tax paid or payable as per normal provisions of the Income Tax Act

• Transfer made to reserves

• Dividend proposed or paid

• Provision for loss of subsidiary companies

• Provision for deferred tax

• Provision for unascertained liabilities

• Depreciation on account of revaluation of assets

 

Here are some negative adjustments:

• Amount withdrawn from provisions or reserves

• Income amount to which provisions of sections 10, 11, and 12 apply, except sections 10AA and 10(38)

• Amount debited from the revaluation reserve is credited to a P/L account to the extent of depreciation due to asset revaluation

• Depreciation amount debited from the P/L account, except depreciation on asset revaluation

Here are the institutions that need to pay MAT:

• Indian companies

• Foreign companies

 

MAT in income tax does not apply to the following entities:

• Individuals

• Hindu Undivided Families (HUFs)

• Partnership firms

• Sole proprietorships

A significant feature of this provision is MAT credit. When a company pays the MAT, it could claim the MAT credit of the paid tax as per the provisions under Section 115JAA. 

 

Here are some key points about MAT credit:

• Companies can carry forward the MAT credit for 15 assessment years

• Companies can utilise this credit for the payment of future tax liabilities

• Companies do not get any interest on MAT credit

• It is the difference between the MAT amount that a company pays and the amount that is payable  

All private or public companies, whether they are Indian or foreign, need to pay the Minimum Alternate Tax. However, here are some exceptions:

• Income that a company receives from the life insurance business 

• Shipping income since it is liable to tonnage taxation u/s 115V to 115VZC

• Companies from a country or territory with which the Indian Government has an agreement u/s 90(1)

• Companies that do not have a permanent establishment in the country as agreed to the Central Government u/s 90A(1) 

• Foreign companies whose total income is from profits and gains from businesses that are referred to in sections 44AB, 44BB, 44BBA, or 44BBB

Every registered company in India needs to pay MAT, provided that they fall within the regulations provided in Section 115JB. If a company hides their income, they will be penalised. 

 

Earlier, it did not apply to companies earning profit in Special Economic Zones (SEZs). Later, in 2011, after the laws were amended, it included companies operating in SEZs.

 

Every company needs to submit a report from a certified CA stating that the company has calculated the book profits as per Section 115JB.

The government is receiving various suggestions to amend Section 115JB and offer more flexibility and inclusivity. In 2015, the government announced a special committee to resolve disputes regarding MAT payments. 

 

Currently, the committee's scope is focused on resolving MAT demands requested by foreign institutional investors. This is because several foreign investors have received notices about MAT payments in the last few months. However, the government is continuously working to control and manage MAT payments in a better manner.