Minimum Alternate Tax (MAT): Eligibility & Calculation of MAT Credit

What is Minimum Alternate Tax (MAT?

Minimum Alternate Tax (MAT) is applicable to Companies in India. MAT was introduced to address the situation where companies reported book profits in their financial statements but ended up paying little or no income tax due to various exemptions, deductions, and allowances available to them under the Income Tax Act.

The companies have to pay a fixed percentage of their profits as Minimum Alternate Tax. MAT applies to all companies, including foreign companies. MAT is calculated under Section 115JB of the Income-tax Act.

What is the objective of levying MAT?

The government of India has always worked to ensure that no individual or company earning a significant profit gets to avoid the payable income tax. This led to the inception of the Minimum Alternative Tax (MAT). The sole purpose of MAT is to facilitate taxation of the zero / low tax companies by making them pay a minimum amount of direct tax based on their book profits.

The key objectives of MAT are as follows:

1. Ensuring Minimum Tax Liability: MAT ensures that companies pay a minimum amount of tax, regardless of their tax exemptions and deductions. It prevents the erosion of the tax base and ensures that companies contribute to the nation's tax revenue.
2. Promoting Equity and Fairness: MAT promotes equity and fairness in the taxation system by reducing the tax advantage enjoyed by companies that may have significant book profits but are able to minimize their taxable income through various means. It ensures that companies, irrespective of their tax planning strategies, make a reasonable contribution towards their tax liability.
3. Encouraging Transparency and Accountability: MAT enhances transparency and accountability in financial reporting by requiring companies to compute their tax liability based on their book profits. This helps in aligning the reported profits with the taxable income, reducing the scope for manipulation or avoidance of taxes.
4. Encouraging Profitable Companies to Contribute: MAT discourages companies from distributing profits as dividends without paying a reasonable income tax. It encourages profitable companies to contribute to the tax revenue by ensuring that they pay a minimum amount of tax.

What is book Profit and its Calculation under MAT?

Book Profit can be the total or net profit in a profit & loss account for a particular year. It is calculated as per the guidelines of the Companies Act 2013. There are various factors on which book profit depends, generally known as adjustments. There are two types of adjustments: positive adjustments and negative adjustments.

Positive Adjustments: These are the amounts to be added to the profit & loss account. Some positive adjustments include:

1. Income Tax payable or paid and the provision thereof, calculated as per the Income Tax Act.
2. Amount transferred to any reserve by whatever name called (Other than reserve specified under Section 33AC)
3. Provision for bad debts and liabilities other than ascertained liabilities.
4. Amount of dividend paid or proposed.
5. The amount represents a notional loss.
6. Amount of depreciation.
7. Provision for loss of Subsidiary Companies.
8. Depreciation, including depreciation on account of revaluation of assets.
9. Amount of any expenses relating to exempt income under sections 10,11,12 (except sec 10(38). This means long-term capital gain exemption under section 10(38) is subject to MAT.
10. Provision made for diminution in the value of an asset.
11. The amount of expenditure related to income, is a share of the assessee in the income of an association of persons or body of individuals, on which no income tax is payable in accordance with the provision of section 86.
12. The amounts of expenditure relatable to income accruing or arising to a taxpayer being a foreign company from (a) the capital gains transactions in securities; or (b) the interest, 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.
13. The amount of expenditure relatable to income by way of royalty in respect of patent chargeable to tax under section 115BBF.
14. The amount standing in the revaluation reserve relating to the revalued assets on the retirement or disposal of such assets if such amount is not credited to the profit and loss account.

In Union Budget 2018, the government announced the Minimum Alternative Tax (MAT) exemption for companies whose case is already being taken up under the Insolvency and Bankruptcy Code. For the said companies amount of unabsorbed depreciation and carry forward loss is allowed to be reduced from Book Profit.

Negative Adjustments: These are the amounts to be deducted from the net profit. Some negative adjustments can be:

• The amount is withdrawn from any reserve or provision.
• The amount of deferred tax.
• Depreciation excluding the depreciation on revaluation of assets
• Amount of income relating to an exemption under section 10,11,12 (except under section 10(38))
• The amount of income relatable to income by way of royalty regarding patent chargeable to tax under section 115BBF.
• The amount of notional gain.
• 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
• The amount of income accruing or arising to a taxpayer being a foreign company from (a) the capital gains transactions in securities; or (b) the interest, 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
• The amount withdrawn from the revaluation reserve is credited to the statement of profit and loss to the extent it does not exceed the amount of depreciation on the revaluation of assets.
• A sick industrial company's profits until its net worth becomes zero/positive
• The amount of loss brought forward or unabsorbed depreciation, whichever is less as per books of account (in case of a company other than the company undergoing insolvency proceedings)
• The aggregate amount of Unabsorbed depreciation and losses brought forward(excluding unabsorbed depreciation) shall be allowed to be reduced from the book profits if a company’s application for corporate insolvency resolution process under IBC,2016 has been admitted by AA.

Calculation of MAT as per Section 115JB

There are specific provisions under the Income Tax Act 1961 under which the MAT is collected from every company. It is calculated under section 115JB of the Income Tax Act.

MAT is calculated at the rate of 15% (plus surcharge and HEC as applicable) of the taxpayer’s book profit, and as per section 115JB of the Income Tax Act, book profit is calculated.

For calculating the tax outflow of the company, first, the tax must be calculated as per the normal provisions under the Income Tax Act. Later it needs to be compared with Tax computed @ 15% (plus surcharge and cess as applicable) on the book profit. This is known as MAT After the said comparison, the highest tax liability must be paid by the company.

MAT rate for a unit of the International Financial Services Center [Section 115JB(7)]:

Any unit of an international Financial Services Centre shall be levied @ 9% (plus surcharge and cess as applicable), provided it is deriving its income solely in convertible foreign exchange.

Applicability & Non-Applicability of MAT

As per section 115JB, every company registered in India is liable to pay MAT. Not only the company have to pay advanced Tax, but in case of hiding the income, the respective company shall be penalized. Previously, when MAT was introduced, it did not apply to companies earning profit in Special Economic Zones (SEZs), but later in 2011, the laws were amended, and it included all such companies operating in SEZs. Every company is required to furnish a report from a certified chartered accountant stating that the book profit has been calculated under the provisions of Section 115JB.

Provisions of Section 115JB are not applicable if

• Any income that is earned through the life insurance business. [Section 115JB(5A)]
• Any shipping income is liable to tonnage taxation.
• A person is a resident of a country or a specified territory with which India has an agreement referred to in section 90(1), and the person does not have a permanent establishment in India in accordance with the provisions of such contract.
• A person is a resident of a country with which India does not have an agreement, and the person is not needed to seek registration under any law for the time being in power relating to the companies.

MAT Credit

When a company is liable to pay a tax under the MAT instead of regular income tax, the company is allowed to claim a credit of MAT paid over the regular Tax. According to the provision in section 115JAA, the company can carry forward and adjust the MAT credit in subsequent years.

• MAT Credit is the amount of the difference between the MAT amount paid and the amount payable under normal tax. When the tax is paid on the standard computation of a company’s income, it is known as normal tax.
• MAT credit is allowed to Set Off when tax is paid on the regular income under the provisions of income tax instead of MAT. Set off is granted to the difference between the tax on the total income and tax which would have been payable as per MAT under section 115JB.

MAT Credit Calculations

If a Company, XYZ Ltd has the taxable income as per normal provisions of the Income Tax Act as Rs. 50 lakhs and Book profits of Rs. 120 lakhs for the FY 2022-23. Then the tax payable would be higher of the two:

Tax on Income: 30% on Rs. 50,00,000 = Rs. 15,00,000
Tax liability as per MAT:15% [The MAT rate has been reduced to 15% from FY 19-20] on Rs. 120,00,000 = Rs. 18,00,000
Thus, the tax paid by the company would be Rs. Rs. 18,00,000
(Higher of the two)
MAT Credit: 1800000-15,00,000
= Rs. 3,00,000
This credit would be carried forward to FY 2023-24 for XYZ Ltd.

TAX Credit Set Adjustments: MAT Credit adjustments or set-offs can be trickier at times, let us understand with an illustration.

*The difference in amount is adjusted from the previous year's MAT credit available.

This MAT credit set off is allowed only if the tax payable as per normal provisions is higher than the tax payable under MAT and also to the extent of the difference between these two. This credit is only allowed for 15 years, and if the credit is still available after 15 years, it will lapse.

Are MAT & AMT the Same?

People often get confused between MAT and AMT. When we discuss the tax levy, the fundamental question arises: Are these two terminologies the same? The answer is NO. MAT and AMT are not the same. MAT, as we have already discussed, is “Minimum Alternative Tax,” and AMT stands for “Alternative Minimum Tax”.

Previously, the concept of MAT was introduced only for companies, but over time, it has been made applicable to all taxpayers through AMT. The primary difference between MAT and AMT is that MAT is levied on companies while AMT is levied on Individuals, HUF, AOP, BOI (whether incorporated or not ), and Artificial Judicial Persons having an Adjusted Total Income exceeding Rs 20 Lakhs.

In simpler words, MAT is applicable only on corporate taxpayers, whereas AMT is applicable to non-corporate taxpayers. AMT is applicable to every individual who has claimed deductions from Section 80H to 80RRB (excluding Section 80P) along with Section 35AD and Section 10AA.

Further, MAT is calculated on the book profit computed as per Explanation 1 to Section 115JB. AMT is calculated on the book profit computed as per the provisions of Section 28 to 43D (i.e., normal business income). The motive behind the introduction of both is same i.e. to collect the tax by the assessee or a company who are avoiding the tax despite earning a substantial profit.

Carry Forward Mechanism for MAT Credit

The Indian income tax system has a carry forward mechanism for Minimum Alternate Tax (MAT) credit. This allows companies to utilize excess MAT paid in one year to offset regular tax liability in subsequent years.

• Eligibility: MAT credit arises when the regular tax liability calculated under the Income Tax Act is lower than the MAT liability. MAT is a minimum tax imposed by the government to ensure some level of tax collection, even if deductions and exemptions significantly reduce the regular tax amount.
• Carry Forward Period: Currently, MAT credit can be carried forward for a period of 15 assessment years from the year it's generated. This means companies have 15 years to utilize the excess MAT paid. Before 2018, the carry-forward period was 10 years.
• Utilization: The MAT credit can be used to offset regular tax liability in subsequent years. However, the amount used cannot exceed the difference between the regular tax payable and the MAT liability for that particular year.
• No Interest: No interest is paid on the carried forward MAT credit.

Infrastructure Sector Exempted from MAT

Foreign investors have always debated the fact that in terms of corporate tax, India has one of the highest tax rate countries in the world. A foreign company conducting business referred to in sections 40B, 40BB, 40BBA, and 40BBB has to pay a defined tax percentage on the book profit in terms of MAT, which makes it hard for them to do business in India.

In the Finance Act 2016, it was stated that MAT would not be applicable to the organizations under foreign institutional investors (FIIs) and foreign portfolio investors (FPIs). These were exempted as they generally do not have a place of business here in India.

But, with the inclusion of the Union Budget 2018-19, it has been made clear that a foreign company in the specified infrastructure sector that operates in the country with the permanent establishment (PE) which are under Section 44BB would not have given MAT. They just have to pay only a certain percentage of presumptive tax on their total operations. With this new tax bracket and exemption of MAT, many companies in the drilling market, like Halliburton and Schlumberger, shipping lines like MSC Mediterranean and Mitsui OSK Lines, or airlines like British Airways, are totally exempted from MAT. The step was taken so as to increase foreign business in India.

Relaxed MAT Norms for Companies Facing Liquidity

Companies that are facing liquidity will be allowed some rebate on the amounts of book profit while calculating Minimum Alternative Tax. In the Financial Bill 2018, it was made clear that the rules for MAT for insolvent companies have been eased out completely. An Insolvent company is one that is not able to pay its debts under the law.

This relaxation was given to make the Insolvency and Bankruptcy Code, 2016, more effective and efficient. The companies that are in loss may not be paying taxes, but with MAT being applicable to them, there was some payout as tax, thereby impacting their financial position. With relaxed MAT norms, these companies will have the option to get a reduction on the total amount of unabsorbed depreciation and loss brought forward (excluding unabsorbed depreciation). It will eventually help all those Companies which are facing financial difficulty.

To put it simply, the introduction of MAT has led to the elimination of zero-tax practices by giant corporations. Also, it has played a significant role in promoting fair tax provisions for foreign, SEZ, and insolvent companies. So, if we see the bigger picture, the Minimum Alternative Tax is a step toward India’s fiscal growth. And therefore, every additional amendment made to this tax law would favor India’s economic development.

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