Minimum Alternate Tax (MAT): Meaning, Rates & Calculation

A corporate tax is a tax on the profits of a company. So, what is the minimum alternate tax (MAT), then? The objective of MAT is to cover "zero tax companies" that do not pay taxes despite having made profits and paid dividends. They save on all payable taxes by availing of tax concessions and rebates as applicable under the Indian Income Tax Act.

What is MAT?

As companies avoided taxes using all possible rebates, the MAT was introduced. MAT is a provision in the IT Act to limit the exemptions and rebates availed by companies. With MAT, companies have to necessarily pay a minimum amount of tax to the government.

MAT: Which Companies must Pay?

As per section 115JB, every company has to pay MAT, if the tax (including surcharge and cess) on the total income, for the financial year is less than 15% of its book-profit + surcharge (SC) + health & education cess. As per Section 115JB, all companies must pay corporate tax at least equal to the higher of the following:

a) Normal Liability:

Tax computation on the taxable income by using tax rates applicable to the company. Tax computed using this method is termed normal tax liability.

b) MAT:

Tax computed @ 15% (plus surcharge and cess as applicable) on book profit. The tax computed using this method is called MAT.

How to Calculate MAT?

MAT is calculated at the rate of 15% of the book profit. Book profit is calculated in line with the provisions of Section 115JB of the Income Tax Act, 1961.

For example:

The taxable income of AB Services Pvt Ltd. is Rs. 28,40,000. The book profit of AB Services Pvt Ltd calculated as per the provisions of section 115JB is Rs. 18,40,000. What will be the tax liability of AB Services Pvt Ltd?

The tax liability of a company is higher of:

1. Normal tax liability, and
2. Minimum Alternate Tax

Thus, the tax liability of AB Services Pvt Ltd will be Rs. 8,52,000, being higher than the MAT.

What is Book Profit for MAT?

As per section 115JB(2) "book profit" means the net profit as shown in the profit and loss statement prepared in accordance with Schedule III to the Companies Act, 2013. Some costs/income is considered along with the profit and loss statement when calculating the book profit.

Some major costs are listed below:

1. Income tax paid/payable and the provision for the same
2. Amounts moved to any reserves except those specified under Section 33AC
3. Provisions for unascertained liabilities
4. Provisions for losses incurred in subsidiary companies
5. Dividends paid/proposed
6. Expenditure related to incomes that are exempt under sections 10 [except section 10(38)], 11 and 12
7. The amount of expenditure related to, income, on which no income tax is payable is in line with provisions of section 86

Major deductions to book profit:

1. Amount withdrawn from reserves or provisions
2. Incomes that are exempt under sections 10, 11 and12 [except those under section10(38)]
3. Depreciation debited to profit and loss statement (excluding the depreciation on revaluation of assets)
4. Amount withdrawn from revaluation reserve such that it does not exceed the depreciation on revaluation of assets

What is MAT Credit?

MAT credit is the difference between MAT and the regular tax. This enables a company to carry forward the “extra” tax it pays under MAT (as against the regular tax liability) in a given financial year, to be utilised in future as a credit to offset its regular tax liability then.

Carry Forward of MAT Credit

You can opt for the carry-forward option in the assessment year in which the regular tax liability is greater than the MAT liability. The maximum MAT credit that you can claim cannot be greater than the difference between the regular tax and MAT. Unutilized MAT credit can be piled up for 15 years. If the company pays regular tax in a financial year, in future, it can utilize the MAT credit either partially or fully.

For example:

The regular tax liability of a company for FY 2018-19 is Rs. 8 lakhs while the liability under MAT is Rs. 8.4 lakhs. In this case, MAT is higher than the regular tax. Therefore, the company is eligible for MAT Credit in line with the provision in Section 115JAA.

MAT Credit = MAT – Regular Tax
= Rs.8.4 lakh – Rs. 8lakh
= Rs.40,000

MAT was introduced to limit the tax deductions/exemptions so that companies pay a “minimum” amount as tax to the government. The MAT operates with a “MAT credit” carry forward mechanism that allows a company to carry forward the “excess” tax paid due to MAT (as against its regular tax liability) in a financial year, to be utilised in future as a credit to offset its regular tax liability.

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised to exercise their caution and not to rely on the contents of the article as conclusive in nature. Readers should research further or consult an expert in this regard.