Minimum Alternate Tax: How to Plan Your Taxes
The "Minimum Alternate Tax," or MAT for short, was instituted to recoup taxes from businesses that had been enjoying tax breaks or exemptions despite their enormous revenues. These businesses give their shareholders significant dividends, but they use different income tax law provisions—like exclusions and deductions—to evade paying taxes. These businesses essentially only pay the minimum amount of taxes or none at all.
MAT was introduced by the Finance Act, of 1987 in response to the growing number of these low-tax firms. It was later withdrawn by the Finance Act 1990 and returned with effect from 1-4-1997 by the Finance (No.2) Act 1996. In this article, we will share a comprehensive overview of MAT and explain how to plan your taxes when it comes into play.
Table of Content
What is the Minimum Alternate Tax?
The Income Tax Act stipulates that Minimum Alternative Tax must be paid. By utilising the numerous deductions and exclusions permitted by the Income Tax Act, corporations that generate enormous profits and distribute dividends to their shareholders but pay little or no tax under the regular terms of the Act are the target of the MAT idea. However, after the implementation of the Minimum Alternate Tax (MAT), businesses are required to pay a set percentage of their profits. MAT is relevant to all businesses, even international ones. The Income-tax Act's Section 115JB describes how MAT is determined.
Each business must pay the greater amount of tax determined by the two clauses listed below:
Tax liability in accordance with the Income Tax Act's standard requirements (tax rate of 30% plus 4% education cess plus surcharge, if applicable): According to the standard rules of the Income Tax Act, domestic corporations with turnover or gross revenues up to Rs. 400 crores are liable for 25% of the total amount due plus a 4% cess and any relevant surcharge.
Tax liability under the MAT provisions is listed in Sec. 115JB (with effect from AY 2020–21 (FY 2019–20)): The tax rate is 15% of book profits plus a 4% education cess plus a surcharge, if applicable.
Prior to FY 2019–20, 18.5% was the MAT rate.
With effect from AY 2020–21, MAT is equal to 15% of book profits (MAT was 18.5% previous to AY 2020–21) (plus surcharge and cess, where applicable).
Purpose of Minimum Alternate Tax
The Indian government has always made an effort to make sure that no person or business making a sizable profit can evade paying income taxes. As a result, the Minimum Alternative Tax was introduced (MAT). MAT exists only to make it easier to tax zero- or low-tax corporations by requiring them to pay a minimum amount of direct tax determined by their book profits.
The following are the main goals of MAT:
Ensuring Minimum Tax Liability: MAT guarantees that businesses, whatever their tax exemptions and deductions, pay a minimum amount of tax. It guarantees that businesses contribute to the country's tax revenue and stops the tax base from being eroded.
Fostering equity and justice: By lessening the tax advantage enjoyed by businesses that may have sizable book profits but are able to minimise their taxable income through various strategies, MAT encourages equity and justice in the taxation system. It guarantees that businesses contribute a fair amount to their tax liability regardless of their tax planning techniques.
Promoting transparency and accountability: By mandating that businesses determine their tax liability using their book earnings, MAT increases financial reporting's transparency and accountability. This lessens the opportunity for tax evasion or manipulation by bringing the reported profits into line with the taxable income.
Encouraging profitable companies to make contributions: MAT works to deter businesses from giving away their revenues as dividends in lieu of making a fair income tax payment. By requiring profitable businesses to pay a minimum level of tax, it encourages them to contribute to the tax income.
Which Companies Have to Pay MAT?
If the income tax payable (including cess and surcharge) under the terms of the Income Tax Act is less than 15% of the book profit plus cess and surcharge, then all companies, whether private or public, regardless of whether they are Indian or foreign, are required to pay MAT.
Exclusions: Income from the life insurance business and shipping income subject to tonnage taxation are not subject to MAT. Sections 115V through 115VZC of the Income Tax Act of 1961 govern the tonnage taxation system.
A foreign firm will not be subject to MAT under tax reforms introduced in the Finance Act 2016, which go into effect retroactively on April 1, 2001, if:
According to Section 90A(1), the corporation (assessee) does not have a permanent establishment in the nation as agreed upon by the Central Government, or the company is from a certain nation or territory with which the Indian government has an agreement. and
The firm (assessee), which is not in possession of the aforementioned agreement and is additionally exempt from the requirement to register under any current business-related laws.
A foreign firm whose whole revenue consists of profits and gains from enterprises included in sections 44AB, 44BB, 44BBA, or 44BBB of the income tax Act is exempt from the MAT rules, under section 115JB(4A)
Calculation of MAT under Section 115JB
The Income Tax Act of 1961 contains explicit regulations that mandate that the MAT be collected from every entity. The Income Tax Act's section 115JB is used to compute it. By section 115JB of the Income Tax Act, book profit is determined, and MAT is computed at the rate of 15% (plus surcharge and HEC where applicable) of that profit. The tax must first be computed by the standard guidelines under the Income Tax Act to determine the company's tax outflow. Afterward, it must be contrasted with tax calculated at 15% of book profit (with appropriate surcharge and cess). This is referred to as MAT. Following the aforementioned comparison, the maximum tax obligation must be paid. Any unit that is part of an international financial services centre is subject to a 9% tax (plus any relevant surcharge and cess) as long as it receives all of its revenue from convertible foreign currencies.
Example:
The Income Tax Act, 1961 states that X Company's taxable income is Rs. 10 lakh if no tax exemptions or incentives are taken advantage of. Therefore, at a corporate tax rate of 22%, this company's usual tax due will be Rs. 2.2 lakh plus cess and surcharge. However, by Section 115JB, this company's book profit is Rs. 20 lakh. Therefore, MAT plus cess and surcharge will be Rs. 3 lakh at a rate of 15% of book profit. The corporation will be required to pay Rs. 3 lakh (plus cess and surcharge) as MAT and not Rs. 2.2 lakh (plus cess and surcharge) because MAT is greater than the regular tax burden.
Book Profit & Calculation under Minimum Alternate Tax
The total or net profit for a specific year in a profit and loss statement is called book profit. It is computed by the 2013 Companies Act requirements. Book profit is dependent on several variables, which are referred to as adjustments. Positive adjustments and negative adjustments are the two categories of adjustments.
Positive Adjustments
These sums need to be included in the profit and loss statement. Among the constructive modifications are:
Income tax that is due or paid, as well as the amount allocated in accordance with the Income Tax Act
Amount deposited into any reserve, regardless of name (other than a reserve listed in Section 33AC)
Make provisions for non-ascertained liabilities and bad debts.
The dividend amount suggested or paid
The sum that symbolises a hypothetical loss
The depreciation amount
A provision for subsidiary company losses
Depreciation, including that which results from an asset's revaluation
The total of all costs associated with exempt income under Sections 10, 11, 12, and (except from Section 10(38)). This indicates that MAT applies to the long-term capital gain exemption under section 10(38)
Provision for an asset's value to decrease
The amount of income-related expenses, which is the assessee's portion of the income of a body of people or association of people, on which section 86 provides that no income tax is due
The expenses associated with income that arises from capital gains transactions in securities for a foreign company taxpayer, or (b) interest, royalties, or fees for technical services that are subject to tax at the rate or rates mentioned in Chapter XII if the income tax payable on the above income is less than the MAT rate
The amount of deferred tax and the accompanying provision
The total amount of expenses related to royalties for a patent that are subject to tax under section 115BBF
If the amount is not credited to the profit and loss account, the amount that remains in the revaluation reserve with regard to the revalued assets upon retirement or disposal of such assets
Negative Adjustments
These sums need to be subtracted from the net profit. The following are examples of negative adjustments:
The amount taken out of any reserve or provision
How much tax is postponed
Depreciation less the depreciation on asset revaluation
The amount of money related to a section 10, 11, and 12 exemption (except from section 10(38))
The total revenue attributable to royalties on patents that is subject to section 115BBF taxation
The notional gain amount
The amount of income—that is, the taxpayer's portion of an association's or body of people' revenue—that, in compliance with section 86's requirements is exempt from income tax and is credited to the profit and loss statement
A taxpayer that is a foreign company may receive income from (a) capital gains transactions in securities, or (b) interest, royalties, or fees for technical services that are subject to tax at the rate or rates listed in Chapter XII, provided that the income is credited to the profit and loss statement and the income tax due on the income above is less than the MAT rate
The amount, up to the amount of depreciation on the revaluation of assets, which is taken out of the revaluation reserve and credited to the profit and loss statement
The earnings of a sick industrial company till its net worth is either positive or zero
The amount carried forward of loss or unabsorbed depreciation, whichever is lower according to the books of account (in the event that a firm other than the one going through insolvency proceedings is involved)
If AA accepts a company's application for the corporate insolvency resolution process under the IBC,2016, then the whole amount of unabsorbed depreciation and losses carried forward (excluding unabsorbed depreciation) may be deducted from the book profits.
When is MAT Applicable and Non-Applicable?
Every firm that is registered in India must pay MAT by section 115JB. In addition to paying advance taxes, the corporation will also face penalties if it conceals its income. When MAT was first implemented, it did not apply to businesses that made money in Special Economic Zones (SEZs). However, later in 2011, the laws were changed to cover all businesses that made money in SEZs. Each business must provide a report from a licenced chartered accountant attesting to the fact that the book profit was determined by Section 115JB.
Section 115JB's provisions do not apply if:
Any money received via the life insurance industry. [JB(5A) Section 115]
Any shipping revenue subject to a tonnage tax
The individual does not maintain a permanent establishment in India in compliance with the terms of the agreement with a country or a designated territory that India has an agreement with, as mentioned in section 90(1)
The individual resides in a nation with which India does not have an agreement, and they are exempt from the requirement to register under any current laws pertaining to the firms
Understanding MAT Credit
A business must pay MAT (which is based on book profit) or the standard tax liability, which is determined by total taxable revenue. The difference between a company's usual tax liability and MAT, where the latter exceeds the former, is known as the MAT Credit.
Assume that X Ltd. has taxable income of Rs. 40 lakhs under the standard provisions of the Income Tax Act and book profits of Rs. 100 lakhs for the fiscal year 2022–2023. Then, the highest of the two taxes would be due:
Income Tax: 30% of Rs. 40,000,000 is Rs. 12,00,000
15% tax liability according to MAT [From FY 19–20, the MAT rate has been lowered to 15%] on Rs. 100,00,000 = Rs. 15,00,000
As a result, the corporation would have paid Rs. 15,00,000 in taxes (the higher of the two)
MAT Credit: Rs. 3,00,000 = 1400000-12,00,000
For X Ltd., this credit would be carried over to FY 2023–2024.
MAT Credit Carry Forward Mechanism
According to the present income tax regulations, there is a carry-forward mechanism for the minimal alternate tax credit. Currently, the assessment year in which the regular tax liability exceeds the MAT liability is when the MAT credit can be claimed. Keep in mind that the difference between your regular tax liability and the MAT liability for the year you are claiming MAT credit cannot be more than the maximum amount of MAT credit that you can claim.
For example, let's say a business has a Rs. 2 lakh MAT credit. Assume further that the company's tax liability for FY 2019–20 is Rs. 10 lakh under MAT provisions and Rs. 10.5 lakh under the regular provisions of the Income Tax Act. In this case, MAT credit can be claimed because the normal tax liability exceeds the MAT liability.
Furthermore, the maximum MAT credit (difference between the regular tax liability and MAT) that can be claimed in this instance is Rs. 50,000. Therefore, in this instance, the company can only claim Rs. 50,000 of the Rs. 2 lakh total MAT credit for FY 2019–20; the remaining Rs. 1.5 lakh credit would be carried over.
MAT Credit for Carry Forward Period
Up to 15 assessment years after the year the MAT credit was created, MAT credit equal to the tax paid over and above MAT over regular tax liabilities may be carried forward.
NOTE: A taxpayer receives no interest on such MAT Credit.
Conclusion
The Minimum Alternate Tax (MAT) is a crucial component of India's tax code. It prevents prosperous businesses from evading taxes by using a variety of exemptions and deductions while electronically paying their income taxes. Since every Budget introduces new tax regulations, businesses and people must remain informed about the most recent MAT provisions. It is necessary to get advice from tax experts and professionals to ensure adherence to MAT requirements and to maximise the effectiveness of tax preparation methods.
FAQ
Q1. How is the tax liability determined under MAT?
The company's book profits are used to determine the tax obligation under MAT. According to the Income Tax Act, the book earnings are adjusted for a few defined items, and the remaining amount is then liable to tax at the relevant MAT rate.
Q2. How much tax rate under MAT in 2023-24?
Starting in FY 2019–20, the MAT rate in India is 15%.
Q3. Does MAT apply to every company?
No, MAT only applies to businesses. Small businesses and specific organisations involved in particular industries or activities may not be subject to the MAT.
Q4. Can you carry over your MAT credit?
Indeed, after the year it was created, MAT credit is carried forward for a total of 15 years. When the tax due under the normal provisions of the Income Tax Act is more than the MAT liability, the credit may be deducted from the regular tax liability in succeeding years.
Q5. Are there any MAT-related exemptions or deductions available?
No, firms cannot claim certain exemptions, deductions, or allowances that are available under the Income Tax Act's ordinary provisions under MAT.
Q6. Are LLPs and international corporations liable to MAT?
Foreign businesses that operate in India or receive revenue from there are subject to MAT.
Q7. Are there any recent changes or updates in Minimum Alternate Tax regulations?
Yes, MAT regulations undergo amendments, and staying informed is crucial. For instance, changes in MAT rates, computation methods, or applicability criteria can impact businesses. Regularly check for updates on the official tax authorities' websites or consult tax professionals.
Q8. Is Minimum Alternate Tax considered a significant concern for small and medium-sized enterprises (SMEs)?
MAT can indeed be a concern for SMEs, particularly in years when their regular income tax liability is lower than the MAT liability. The obligation to pay MAT could affect cash flow, and SMEs should carefully plan their tax strategies to manage this impact.
Q9. Are there any industry-specific considerations regarding Minimum Alternate Tax?
Yes, different industries may have specific nuances influencing their MAT impact. Some sectors might be more affected due to variations in depreciation rates, investment patterns, or other industry-specific factors. Therefore, understanding these industry-specific considerations is essential for effective tax planning.
Q10. Can businesses claim exemptions or credits to offset the impact of Minimum Alternate Tax?
Businesses can explore exemptions and credits to alleviate the impact of MAT. However, the availability of these benefits varies. Seeking advice from tax professionals can help identify applicable exemptions and credits tailored to the business's circumstances.
Q11. Is Minimum Alternate Tax (MAT) applicable to all businesses in India?
Yes, MAT applies to all companies in India, ensuring that even those with low or no taxable income under regular provisions pay a minimum level of tax. The intent is to prevent companies from escaping taxation entirely. It is crucial for businesses to factor in MAT obligations while planning their tax liabilities.
Q12. Are AMT and MAT the same?
The main distinction between AMT and MAT is that AMT is imposed on individuals, HUFs, AOPs, BOIs (whether or not they are incorporated), and Artificial Judicial Persons whose Adjusted Total Income exceeds Rs 20 lakh. MAT is imposed on firms.
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