The complete guide about Minimum Alternate Tax is as follows. Check who are eligible to pay MAT and features of MAT. Read more to know how to calculate MAT and find MAT rates for Domestic and Foreign Companies.
What is Minimum Alternate Tax?
Generally, Companies may find various loopholes to avoid income tax by using several exemptions. For such companies, Income Tax Act, 1961 has introduced the MAT. MAT (Minimum Alternate Tax) is a way of making companies pay a minimum amount of tax. The MAT was introduced for companies and later it has been made applicable to all other taxpayers in the form of AMT (Alternate Minimum Tax). Minimum Alternate Tax is a type of direct tax.
Sometimes, it may happen that a company (taxpayer) may have generated income during the year but it may not have paid any tax at all or may have reduced its tax liability by taking the advantage of various provisions of Income-tax law like deductions, exemptions, depreciation, etc. The number of zero tax paying companies are increasing. Due to this reason, Minimum Alternate Tax (MAT) was introduced by the Finance Act, 1987 w.e.f the AY (Assessment Year) 1988-89. It was withdrawn by the Finance Act, 1990 and then reintroduced by Finance Act, 1996, w.e.f 1-4-1997.
The main objective of introducing the MAT is to tax “Zero Tax” companies that make high book profits and declare substantial dividends to their shareholders but have no or insignificant taxable income under the IT Act.
As per section 115JB, under the provisions of the MAT Act, every company foreign or domestic is required to pay Minimum Alternate Tax. This is to ensure that no taxpayer (assessee) with substantial economic income gets to avoid income tax liability on account of various deductions, exclusions, and credits.
Who are eligible for the Payment of MAT?
The Minimum Alternate Tax payment is only to be done by the companies and this MAT is not applicable to other taxpayers like individuals, Hindu Undivided Families (HUFs), Partnership firms etc. The AAR (Authority for Advance Rulings) has held that the provisions under section 115JA are applicable to foreign companies with respect to the profits derived from operations in India.
Minimum Alternate Tax Calculation/Computation
As per the MAT act, the Minimum Alternate Tax liability of a company will be higher of the following:
- Tax liability computed as per the normal provisions of the Income Tax Law, i.e., tax computed on the taxable income of the company by applying the tax rate applicable to the company. Such tax can be termed as normal tax liability.
- Tax computed at the rate of 18.5% on book profit. The tax computed by applying 18.5% (plus surcharge & cess as applicable) on book profit is called Minimum Alternate Tax.
Book Profit: “Book profit” means the Net Profit as shown in the profit and loss account for the relevant previous year as determined by the provisions of Schedule III to the Companies Act, 2013, with certain adjustments as given in section 115JB of the Act.
The taxable income of Shinee Pvt. Ltd. computed as per the provisions of Income tax Act = Rs. 8,40,000.
Book profit of the company computed as per the provisions of section 115JB = Rs. 18,40,000.
The tax liability of a company will be higher of: (i) Normal tax liability, or (ii) MAT.
- Normal tax rate applicable to an Indian company is 30% (plus cess and surcharge as applicable). That is, the tax at the rate of 30% on Rs. 8,40,000 = Rs. 2,52,000 (plus cess).
- Book profit of the company is Rs. 18,40,000. MAT liability (excluding cess & surcharge) @ 18.5% on Rs. 18,40,000 = Rs. 3,40,400.
Thus, the tax liability of Shinee Pvt. Ltd. will be Rs. 3,40,400 (plus cess as applicable) because it is higher than the normal tax liability.
The Minimum Alternate Tax Rates as per AY 2017-18 or AY 2016-17 is as follows. Check the Tax rates (including Surcharge, Education Cess and Secondary and Higher Education Cess) applicable for both Domestic and Foreign companies.
|PARTICULARS||TAX||SURCHARGE||EDUCATION CESS||SECONDARY AND HIGHER EDUCATION CESS||EFFECTIVE TAX|
|i.||Domestic Companies with total income not exceeding 1 Crore.||18.5%||Nil||2%||1%||19.055%|
|ii.||Domestic Companies with total income between 1 Crore to 10 Crore.||18.5%||7%||2%||1%||20.389%|
|iii.||Other Domestic Companies||18.5%||12%||2%||1%||21.342%|
|iv.||Foreign Companies with total income not exceeding 1 Crore.||18.5%||Nil||2%||1%||19.06%|
|v.||Foreign Companies with total income between 1 crore to 10 crore||18.5%||2%||2%||1%||19.44%|
|vi.||Other Foreign Companies||18.5%||5%||2%||1%||20.01%|
Features of MAT regime
Certain important provisions and features of the current Minimum Alternate Tax regime are explained below.
For companies based on principles equity, MAT credit is a beneficial provision. If the tax paid by the company is more than that accrued, then 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 MAT provisions of the Act and calculated under the general provisions of the Income Tax Act.
Such excess of Minimum Alternate tax credit is allowed to be carried forward and set-off in the FY (financial year) in which the company is charged to tax under the general provisions of the IT Act. This MAT credit can be set-off and carried forward for 10 consecutive AYs (assessment years) succeeding (after) the year in which the tax credit first accrued.
Advance payment of Tax:
Under the Income Tax Act, every taxpayer is required to pay the tax in advance if the advance tax liability as computed is Rs. 10,000/- (in accordance with the provisions of Chapter XVII of the Act) or more during the FY (financial year).
As per Rule 40B of the Income Tax Rules, 1962, every company to which Minimum Alternate Tax is applicable is required to furnish a MAT report in the prescribed Form 29B.
MAT Applicability in Special Economic Zones (SEZs):
At first when the MAT was rolled by the government, this MAT did not apply to profit earned by any company via business activities and operations in SEZs (Special Economic Zones). However, the amendmends were made by the Finance Act, 2011 to include all such companies operating in Special Economic Zones (SEZs) and earning profit from there, under the Section 115JB for MAT payment.