Minimum Alternate Tax (MAT)
An overview of Minimum Alternate Tax (MAT).
What is the Minimum Alternate Tax (MAT)?
Minimum Alternate Tax (MAT) is a rule in tax laws that ensures companies pay a minimum amount of tax to the government, even if they qualify for tax exemptions. According to Section 115JB, all companies must pay corporate tax, and it should be at least equal to the higher of these two amounts:
- Regular Tax Liability: This is calculated based on the government’s standard tax rules and tax rates for a company’s taxable income.
- Minimum Alternate Tax (MAT): For the fiscal year 2019-20, MAT is calculated at 15% (previously 18.5%) on the company’s book profit and any applicable additional charges.
Note: If companies are part of an International Financial Services Centre and their income comes only from foreign money that’s easy to exchange, they pay a lower MAT rate of 9%, plus any extra charges, if applicable.
Basic Provisions of Minimum Alternate Tax
- The first step towards calculating tax liability is as per the Normal provisions of Income Tax Act (tax rate 30% + 4% Edu cess + surcharge (if applicable)
- The second step towards calculating tax liability is as per the MAT provisions are given in Sec 115JB (18.5 % of Book Profits+ 4 % education cess + surcharge (if applicable).
According to Section 115JB, every taxpayer or company is eligible to pay income tax. It applies to all public and private companies, including Indian and foreign companies working from India, except those who are engaged in infrastructure and power.
How to calculate MAT?
We calculate MAT as 15% of the taxpayer’s book profit. We determine book profit in accordance with Section 115JB of the Income Tax Act of 1961.
How is Book profit calculated?
Book Profits refer to the net profit as shown in the profit and loss account for the previous year as increased and decreased by the following items:
Additions to net profit (amount debited to profit and loss account)
- Income tax paid or payable, if calculated as per the standard provisions of the Income Tax Act.
- Paid or proposed dividends
- Provision for losses of subsidiary companies
- Depreciation amount
- Estimated loss on the transfer of a capital asset
- Provision of deferred tax
- Amount set aside as provisions for meeting liabilities
- Transfer made to any reserve
Deletions to Net profit (amount credited to profit and loss account)
- Withdrawal of amount from reserves or any provisions
- Withdrawal of amount from the revaluation reserve credited to profit and loss account to the extent of depreciation on account of revaluation of the asset.
- The loss amount brought forward or unabsorbed depreciation, whichever is least as per the books of accounts. Also, the loss shall not include depreciation.
- Amount of Deferred Tax
- Amount of depreciation debited to the Profit and Loss Account (excluding the depreciation on revaluation of Assets).
What is MAT Credit?
A company must pay the higher of two taxes: the regular tax liability (calculated based on total taxable income) and MAT (calculated based on book profit). When a company’s MAT exceeds its regular tax liability, we call the difference between the MAT and regular tax liability “MAT Credit.”
For example, In the financial year 2019-20, a company’s regular tax liability under the standard provisions of the Income Tax Act amounts to Rs. 8 lakh, while the liability under MAT provisions is Rs. 8.4 lakh. In this scenario, MAT is higher than the regular tax liability, allowing the company to MAT Credit under Section 115JAA.
MAT Credit Amount = MAT – Regular Tax Liability
= Rs. 8.4 lakh – Rs. 8 lakh
= Rs. 40,000
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Frequently Asked Questions (FAQs)
1. How long can you keep MAT credit?
Ans: You can carry forward MAT credit for up to 15 assessment years from the year when you first generated it.
2. Does MAT apply to every company?
Ans: No, MAT doesn’t apply to all companies. Small companies and certain specified entities involved in particular industries or activities may be exempt from MAT.
3. Do foreign companies or LLPs have to deal with MAT?
Ans: MAT applies to foreign companies that either have a physical presence or earn income from a source within India.
4. Is there a surcharge for MAT?
Ans: Yes, when you calculate the total tax paid on MAT, you include both surcharge and cess.