The Minimum Alternative Tax (MAT) is a provision introduced in direct tax laws to limit the tax deductions/exemptions otherwise available to taxpayers so that they pay a ‘minimum’ amount of tax to the government. Due to increase in the number of zero tax paying companies, MAT was introduced by the Finance Act, 1987 with effect from assessment year 1988-89. Later on, it was withdrawn by the Finance Act, 1990 and then reintroduced by Finance (No. 2) Act, 1996, wef 1-4-1997. In India, when applied to companies, AMT is termed the Minimum Alternate Tax (MAT), operating with a “MAT credit” carry forward mechanism. This allows a company to carry forward the “excess” tax it pays because of MAT (as against its regular tax liability) in a particular year, to be utilized in a future year as a credit against its regular tax liability.
2. Objectives of MAT
The objective of introduction of MAT is to bring into the tax net “zero tax companies” which in spite of having earned substantial book profits and having paid handsome dividends, do not pay any tax due to various tax concessions and incentives provided under the Income-tax Law.
3. MAT Rate
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 18.50% of its book-profit + surcharge (SC) + health & education cess.
(Note1:-On 20-Sep-2019 Finance Minister slashed MAT rate to provide relief to companies which continue to avail exemptions/incentives, the government has reduced the rate of Minimum Alternate Tax or MAT to 15%, from 18.5%)
(Note2:- 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)
4. Applicability of MAT provisions
As per Section 115JB. (1) Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee, being a company, the income-tax, payable on the total income as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 2012, is less than eighteen and one-half per cent of its book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of income-tax at the rate of eighteen and one-half per cent.
(2) Every assessee,—
(a) being a company, other than a company referred to in clause (b), shall, for the purposes of this Section, prepare its statement of profit and loss for the relevant previous year in accordance with the provisions of Schedule III to the Companies Act, 2013 (18 of 2013); or
(b) being a company, to which the second proviso to sub-Section (1) of Section 129 of the Companies Act, 2013 (18 of 2013) is applicable, shall, for the purposes of this Section, prepare its statement of profit and loss for the relevant previous year in accordance with the provisions of the Act governing such company:
From the above it can be observed that the provisions of MAT are applicable to every company whether public or private and whether Indian or foreign.
5. Non-Applicability of MAT provisions
As per Explanation 4 to Section 115JB as amended by Finance Act, 2016 with retrospective effect from 1/4/2001, it is clarified that the MAT provisions shall not be applicable and shall be deemed never to have been applicable to an assessee, being a foreign company, if—
[As amended by Finance (No. 2) Act, 2019]
i. the assessee is a resident of a country or a specified territory with which India has an agreement referred to in sub-Section (1) of Section 90 or the Central Government has adopted any agreement under sub-Section (1) of Section 90A and the assessee does not have a permanent establishment in India in accordance with the provisions of such agreement; or
ii. the assessee is a resident of a country with which India does not have an agreement of the nature referred to in clause (i) and the assessee is not required to seek registration under any law for the time being in force relating to companies.
Further, as per Explanation 4A to Section 115JB as inserted by Finance Act, 2018, MAT provisions shall not be applicable to a foreign company, whose total income comprises of profits and gains arising from business referred to in Section 44AB, 44BB, 44BBA, or 44BBB and such income has been offered to tax at the rates specified in those Sections.
As per Section 115JB (5A) MAT shall not apply to any income accruing or arising to a company from life insurance business referred to in Section 115B. Further, as per provisions of Section 115V-O the provisions of MAT will not apply to a shipping income liable to tonnage taxation, i.e., tonnage taxation scheme as provided in Section 115V to 115VZC.
6. Computation of Book Profit as per MAT provisions
As per Explanation 1 to Section 115JB(2) “book profit” for the purposes of Section 115JB means net profit as shown in the statement of profit and loss prepared in accordance with Schedule III to the Companies Act, 2013 as increased and decreased by certain items prescribed in this regard. The items to be increased and decreased are as follows:
(A). Positive Adjustment: Amount to be Added Back if Debited to Profit and Loss Account:
(B). Negative Adjustments -Amount to be Deducted from Net Profit:
The following income, if credited to profit and loss account, shall be deducted—
7. MAT Credit
As discussed in earlier part, a company has to pay higher of normal tax liability or liability as per MAT provisions. If in any year the company pays liability as per MAT, then it is entitled to claim credit of MAT paid over and above the normal tax liability in the subsequent year(s).The provisions relating to carry forward and adjustment of MAT credit are given in Section 115JAA.
Provided that where the amount of Foreign Tax Credit “FTC” (i.e. Income Tax paid in any country outside India) allowed against the MAT exceeds the amount of such FTC admissible against the tax payable by the assessee under normal provisions of the Income-Tax Act, then, while computing the amount of FTC under this sub-Section, such excess amount shall be ignored.
8. Carry forward and adjustment of MAT credit
The credit of MAT can be utilized by the company in the subsequent year(s). The credit can be adjusted in the year in which the liability of the company as per the normal provisions is more than the MAT liability. The set off in respect of brought forward MAT credit shall be allowed in the subsequent year(s) to the extent of the difference between the tax on its total income as per the normal provisions and as per the MAT provisions.
As discussed earlier, the company can carry forward the MAT credit for adjustment in subsequent year(s), however, the MAT credit can be carried forward only for a period of 15 years after which it will lapse.