What is Minimum Alternate Tax?
Minimum Alternate Tax (MAT) is levied under Income Tax Act. This was introduced to target such companies which book high profit but pay almost no or minimal tax by taking the benefit on account of various exclusions, deductions and incentives.
As per Section 115JB of the Income Tax Act, 1961, where in the case of a domestic or foreign company, the income tax payable as computed under the Income Tax Act of any assessment year is less than 18.5% of its book profits, such books profits shall be deemed to be the net income of the assessee and tax payable shall be computed at the rate of 18.5%.
Applicability of MAT
The Minimum Alternate Tax is applicable only on Companies and is not applicable on Individuals, HUF’s, Partnership firms, Limited liability firms (LLP’s) etc.
How to Calculate MAT?
MAT is calculated as per Section 115JB(1) of the Income Tax Act, Tax liability shall be higher of the following amounts:
- Tax computed under the normal provisions of the Income Tax Act. [30% Tax Rate plus surcharge and cess as applicable].
- 18.5% of the Book profits (plus surcharge and cess as applicable). The tax so computed at the rate of 18.5% on book profit is called MAT.
- Where, Corporate Tax Rate for Domestic Companies in India:
|Total Turnover upto Rs.50 crore in the previous year||25%|
|Total Turnover more than Rs.50 crore in the previous year||30%|
In addition cess and surcharge is levied as follows:
Book Profit is the net profit which is shown in the Profit and Loss account prepared in accordance with Schedule III of Companies Act, 2013 for the relevant year as increased and decreased by the following items -
To be Added to the Net Profit (If debited to P/l A/c i.e. deducted from gross income):
1. Income Tax paid or payable and calculated as per normal provisions of Income Tax Act, 1961.
2. Amount carried to any reserve
3. Dividend paid or proposed
4. Amount of Provision for loss of subsidiary companies
5. Depreciation including depreciation on revaluation of assets
6. Amount and provision of deferred tax
7. Provision for unascertained liabilities i.e. provision for bad debts
8. Amount of expense relatable to any income u/s 10,11,12 (other than long term capital gain exempted u/s 10(38) which means it is subject to MAT).
9. Expenditure relating to income by way of royalty in respect of patent chargeable to tax under section 115BBF.
10. Provision for diminution in the value of asset.
To be deducted from Net profit (If credited to P/L A/c i.e. if added to the gross income):
1. Amount of depreciation debited to P&L A/c (excluding the depreciation on revalued Assets) i.e. if the company has a negative depreciation amount
2. Amount of income to which any of the provisions of section 10, 11 & 12 other than 10(38) apply.
3. Amount withdrawn from any reserves or provisions if credited to P&L account.
4. Amount withdrawn from revaluation reserve and credited to profit & loss account to the extent of depreciation on account of revaluation of asset.
5. Brought forward Losses or unabsorbed depreciation; whichever is less as per the books of account. However such loss shall not include the depreciation. (Where in case the brought forward loss or unabsorbed depreciation is nil then nothing shall be deducted.)
6. Amount of Deferred Tax, if credited to profit & loss account
7. Income in respect of royalty in respect of patent chargeable to tax under section 115BB.
Let us understand MAT with an Illustration:
Illustration: The taxable income of Saksham Pvt. Ltd. computed as per the provisions of Income-tax Act is Rs. 9,40,000. Book profit of the company computed as per the provisions of section 115JB is Rs. 17,40,000. What will be the tax liability of ABC Pvt. Ltd. (ignore cess and surcharge)?
The tax liability of a company will be higher of: (i) Normal tax liability, or (ii) MAT u/s 115JB.
Where, Normal tax rate applicable to an Indian company is 30% (plus cess and surcharge as applicable). Tax at 30% on Rs. 9,40,000 will amount to Rs. 2,82,000 (plus cess). Book profit of the company is Rs. 19,40,000. MAT liability (excluding cess and surcharge) at 18.50% on Rs.19,40,000 will come to Rs. 3,58,900. Thus, the tax liability of ABC Pvt. Ltd. will be Rs. 3,58,900 (plus cess as applicable) being higher than the normal tax liability.
Note : A domestic Company pays tax a rate of of 25% if, its turnover or gross receipt is not more than Rs. 50 crores in the previous year. In this illustration, it is assumed that Company's turnover exceeds Rs.50 in previous year.
What is MAT Credit?
(i) When any company pays minimum alternate tax under section 115JB of Income Tax Act, instead of regular tax, then the tax paid is higher than tax payable as per normal provisions of the Income Tax Act, the excess amount is credited back as Tax Credit to the company as per the provision of Section 115JAA.
(ii) MAT Credit Available= Tax Paid as per MAT calculation u/s 115JB – Tax Payable under the normal provisions of Income Tax Act.
(iii) MAT Credit shall be set off in the assessment year in which:
Tax payable under the normal Tax payable under
provisions of Income Tax Act> MAT u/s 115JB
(iv) MAT credit shall be allowed to carried forward and set off upto 15 Assessment years.
Let us understand MAT credit with an Illustration:
Illustration - The tax liability of ABC Pvt. Ltd. for the financial year 2018-19 under the normal provisions of the Income-tax Act is Rs. 19,40,000 and the liability as per the provisions of MAT is Rs. 19,00,000. It has brought forward MAT credit of Rs. 2,50,000. Can the company adjust the MAT credit? What will be the tax of the company after adjustment of MAT credit?
- MAT credit can be set-off in the year in which the Tax liability of the company as per the Income Tax Act 1961 provisions is higher than the Tax liability as per MAT. In this case the tax liability as per the normal provisions of the Income-tax Act is Rs. 19,40,000 and the liability as per the provisions of MAT is Rs. 19,00,000. Tax Liability under the normal provisions is higher than liability as per the provisions of MAT and therefore, the company can adjust the MAT credit.
- Brought forward MAT credit shall be allowed to be set off in the subsequent years up to the difference between the tax liability as per the normal provisions and tax liability as per the MAT provisions. Thus, after adjusting MAT credit, the liability of the company should not be less than tax liability as per the provisions of MAT. In this illustration, the liability as per MAT is Rs. 19,00,000, and, hence, after claiming set off of the MAT credit, the liability of company cannot be less than Rs. 19,00,000. Hence,out of the credit of Rs. 2,50,000 the company can claim credit of Rs. 40,000 only and the balance credit of Rs. 1,60,000 can be carried forward to subsequent year(s).
So let us try to understand it with the help of another example:
Tax Payable as per MAT
Tax Payable as per normal provisions
Actual Tax Payable
MAT Tax Credit Available u/s 115JAA
Tax Credit Set off/ adjusted
Total Tax Credit Available