Minimum Alternative Tax

Minimum Alternative Tax is payable by the companies under the Income Tax Act 1961. MAT was introduced with a view to target companies that make huge profits and pay dividends to their shareholders but at the same time pay no or minimal tax under the normal provisions of the Income Tax Act, 1961 by taking advantage of the various deductions, and exemptions allowed under the Act. MAT applies to all companies, along with foreign companies.

Section 115JB of the Income-tax Act guides for the calculation of MAT Liability. Every company must pay a higher tax calculated under the following two provisions: MAT provision and Normal provision.

1. As per the Normal provisions of the income tax act, 1961 tax rate 30% plus 4% cess plus surcharge if applicable.

2. As per the MAT, provisions are given in Sec 115JB at the rate of 18.5 % of Book Profits Plus 4 % education cess plus a surcharge if applicable. The tax rate is 15% with effect from AY 2020-21 (FY 2019-20)

MAT Calculation

MAT is equal to 18.5% (15% from AY 2020-21) of Book profits Plus Surcharge and cess as applicable. Here Book profit means the net profit as shown in the profit & loss account for the year as increased and decreased by the following items:

Added to the Net Profit (If already debited to the Profit and Loss Account)

  1. Income Tax paid or payable is calculated as per normal provisions of the income tax act.
  2. Transfer made to reserve
  3. Dividend paid or proposed
  4. Provision for loss of subsidiary companies
  5. Depreciation 
  6. Amount or provision of deferred tax 
  7. Provision for unascertained liabilities
  8. Amount of expense relating to exempt income under sections 10,11,12 However there are some exemption related to these sections 

Subtracted from the Net Profit (If already credited to the Profit and Loss Account)

  1. Amount withdrawn from any reserves or provisions
  2. The amount of income which is governed by the provisions of sections 10, 11 & 12 except 10AA & 10(38) applies.
  3. The amount is withdrawn from revaluation reserve and credited to profit & loss account to the extent of depreciation on account of revaluation of an asset.
  4. Amount of loss brought forward or unabsorbed depreciation, whichever is less as per the books of account. However, depreciation shall not be included in such loss. 
  5. Amount of Deferred Tax, 
  6. Amount of depreciation debited to the Profit and Loss Account 

MAT Credit

When a company pays any amount of tax in the form of MAT, then the credit of the same can be claimed by the company in accordance with section 115JAA.

The tax credit shall be carried forward for 15 Assessment Years immediately succeeding the assessment year in which such credit has become allowable. This is with effect from AY 2018-19 prior to which MAT could be carried forward only for a period of 10 DAYs. For instance, if the excess tax is paid in FY 2017-18, then the credit of such tax can be carried forward from FY 2018-19.

MAT credit shall be allowed to be set off in a year when the tax becomes payable on the total income in accordance with the normal provisions of the Act. Set off shall be allowed to the extent of difference between the tax on the total income under normal provision and tax which would have been payable as per MAT under section 115JB.

  • Higher of, Tax Liability under MAT OR Tax Payable as per normal provisions, shall be paid.
  • MAT credit set-off is allowed only if the tax payable as per normal provisions is greater than the tax payable as per MAT and also to the extent of the difference between the two.
  • MAT Credit Available under section 115JAA: Tax Payable under MAT — Tax Payable as per normal provisions

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