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Minimum Alternate Tax - Calculation and Applicability of MAT Provisions

Updated: Feb 9


Purpose behind MAT Imposition:

There are instances where a company, despite generating income, utilizes various provisions of the Income-tax Law (such as exemptions, deductions, and depreciation) to minimize or eliminate its tax liability. To address the growing number of companies paying zero taxes, Minimum Alternate Tax (MAT) was introduced by the Finance Act, 1987, effective from the assessment year 1988-89. Although it was temporarily withdrawn by the Finance Act, 1990, it was subsequently reintroduced by the Finance (No. 2) Act, 1996, effective from April 1, 1997.


The primary objective behind MAT is to ensure that "zero tax companies," which, despite earning significant book profits and distributing substantial dividends, evade tax due to various concessions and incentives provided by the Income-tax Law, are brought within the tax net. Over time, MAT provisions have undergone several changes, and currently, it is imposed on companies in accordance with the regulations outlined in section 115JB.


Applicability of MAT

As per section 115JB, every taxpayer being a company is liable to pay MAT if,

  • the Income tax (including surcharge and cess) payable on the total income, computed as per the provisions of the Income-tax Act in respect of any year is less than

  • 15% of its book-profit (manner of computation of book profit is discussed below) + surcharge (SC) + health & education cess.

Non-applicability of MAT

However, the provisions of MAT are not applicable on:

a) The domestic companies which have opted for tax regimes under Section 115BAA (Option for Corporate Tax @ 22% ) or Section 115BAB (Option of Corporate Tax @ 15%)

b) Any income accruing or arising to a company from the life insurance business referred to in Section 115B.

c) Shipping company, the income of which is subject to tonnage taxation.

d) Foreign Company


Basic provisions of MAT

As per the concept of MAT, the tax liability of a company will be higher of the following:

  • Tax liability of the company computed as per the normal provisions of the Income-tax Law,

  • Tax computed @ 15% (plus surcharge and cess as applicable) on book profit.

  • MAT is levied at the rate of 9% (plus surcharge and cess as applicable) in case of a company, being a unit of an International Financial Services Centre and deriving its income solely in convertible foreign exchange.

What is Book Profit?

The term "book profit" for section 115JB refers to the net profit presented in the statement of profit and loss, following Schedule III of the Companies Act, 2013. This net profit is then adjusted by specific items as prescribed. The adjustments include both increases and decreases, and the specified items are as follows:

 Particulars

 Amount

 Net profit as per statement of profit and loss prepared in accordance with Schedule III to the Companies Act, 2013

XX

Add: Following items (if they are debited to the statement of profit and loss)

 

 a)     Income-tax paid/payable and the provision thereof

XX

 b)    Amounts carried to any reserves by whatever name called (Other than reserve specified under Section 33AC)

XX

 c)     Provisions for unascertained liabilities

XX

 d)    Provisions for losses of subsidiary companies

XX

 e)     Dividends paid/proposed

XX

 f) Expenditure related to exempt income

XX

g) The amount or amounts of expenditure relatable to, income, being share of the taxpayer in the income of an association of persons or body of individuals, on which no income-tax is payable in accordance with the provisions of section 86.

XX

 h)    The amount or amounts of expenditure relatable to income accruing or arising to a taxpayer being a foreign company, from the capital gains arising on transactions in securities; or the interest, dividend royalty or fees for technical services chargeable to tax at the rate or rates specified in Chapter XII if the income-tax payable on above income is less than the rate of MAT

 

 

    XX

 i)      The amount representing notional loss on transfer of a capital asset, being share or a special purpose vehicle to a business trust in exchange of units allotted by that trust referred to in clause (xvii) of section 47 or the amount representing notional loss resulting from any change in carrying amount of said units or the amount of loss on transfer of units referred to in clause (xvii) of section 47

 

 

    XX

j)      Expenditure relatable to income by way of royalty in respect of patent chargeable to tax under section 115BBF

  XX

k)    Amount of depreciation debited to P & L A/c

  XX

 l)      Deferred tax and the provision thereof

  XX

 m)   Provision for diminution in the value of any asset

XX

 n)    The amount standing in revaluation reserve relating to revalued asset on the retirement or disposal of such an asset if not credited to statement of profit and loss

 

XX

 o)    The amount of gain on transfer of units referred  in clause(xvii) of section 47 computed by considering the cost of the shares exchanged with units referred to in the said clause or the carrying amount of the shares at the time of exchange where such shares are carried at a value other than the cost through statement of profit and loss as the case may be;

 

 

 

XX

 

Less: Following items (if they are credited to the statement of profit and loss)

 

 p)    Amount withdrawn from any reserve or provision if credited to P&L account

(XX)

 q)    Incomes which are exempt under section 10 [other than section 10(38)] section 11 and section 12

(XX)

 r)     Amount of depreciation debited to statement of profit and loss (excluding the depreciation on revaluation of assets)

(XX)

 s)     Amount withdrawn from revaluation reserve and credited to statement of profit and loss to the extent it does not exceed the amount of depreciation on revaluation of assets

(XX)

 t)      The amount of income, being the share of the taxpayer in the income of an association of persons or body of individuals, on which no income-tax is payable in accordance with the provisions of section 86, if any such amount is credited to the statement of profit and loss

XX

u)    The amount of income accruing or arising to a taxpayer being a foreign company from the capital gains arising on transactions in securities; or the interest, dividend royalty or fees for technical services chargeable to tax at the rate or rates specified in Chapter XII if such income is credited to the statement of profit and loss and the income-tax payable on above income is less than the rate of MAT.

XX

 v)     The amount (if any, credited to the statement of profit and loss) representing notional gain on transfer of a capital asset

XX

 w)   Income by way of royalty in respect of patent chargeable to tax under section 115BBF

 XX

 x)     Amount of brought forward loss or unabsorbed depreciation, whichever is less as per books of account (in case of a company other than the company undergoing insolvency proceedings)

(XX)

 y)     Profits of a sick industrial company till its net worth becomes zero/positive

(XX)

 z)     Deferred tax, if credited to statement of profit and loss

(XX)

Book profit to be used to compute MAT

XX


To read about the MAT Credit and Its Utilization and Accounting Treatment of MAT Credit please read here


 

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