MAT or minimum alternative tax refers to a tax paid to by a company in advance. We should note that companies must pay tax according to the provisions of the income tax act, the profit and loss account is calculated as per companies act,2013. So prior to MAT what happened was; companies having profits used to distribute huge dividends, and thereby showed their income nil or negligible according to the provisions of income tax act, these companies were so called ‘zero tax’ companies. This was done as income tax act allows for various exemptions and deductions from individuals/companies income, moreover the rate of depreciation under Income Tax Act and Companies Act are also different as companies act provide lower rate in comparison with Income Tax Act, the result of such incentives, lower depreciation , deductions and exemptions make the companies profit negligible or even negative in some cases.
Example : Birla Group and Reliance Industries brought companies having huge unabsorbed depreciation and losses under Income Tax Act, these companies after being taken over by big companies and these big companies adjusted these above stated losses against their profits and converts their companies act profit balance sheet into zero tax under Income Tax Act, to plug these devices MAT was introduced, which through Section 115JA under Income tax act, which provides that the companies which book profit shall have to ay minimum alternate tax at 18.5%( Amended to 15%, to boost economy). This provision is important as it ensures companies to pay at least a minimum amount of tax, even foreign companies sourcing their income from India. Therefore discontinuing this provision will lead to tax avoidance.
One is to note that MAT is not applicable to companies engaged in infra and power, income from free trade zones, charitable activities and investments by venture capital companies.
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