Definition:

MAT stands for Minimum Alternate Tax and AMT stands for Alternate Minimum Tax. Initially the concept of MAT was introduced for companies and progressively it has been made applicable to all other taxpayers in the form of AMT.

Historical Background :

At times it may happen that a taxpayer, being a company, may have generated income during the year, but by taking the advantage of various provisions of Income-tax Law (like exemptions, deductions, depreciation, etc.), it may have reduced its tax liability or may not have paid any tax at all. Due to increase in the number of zero taxpaying 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 Later on, it was withdrawn by the Finance Act, 1990 and then reintroduced by Finance (No. 2) Act, 1996, wef 1-4-1997.

Objective :

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.

Since the introduction of MAT, several changes have been introduced in the provisions of MAT and today it is levied on companies as per the provisions of section 115JB.

Provisions:

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, i.e., tax computed on the taxable income of the company by applying the tax rate applicable to the company.

Tax computed @ 18.5% (plus surcharge and cess as applicable) on book profit (manner· of computation of book profit). The tax computed by applying 18.5% (plus surcharge and cess as applicable) on book profit is called MAT.

Higher of the two is applicable; Mat Credit may be carried forward to next 15 Years.

Note: 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.

Meaning of Book Profit :

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:

Computation of Book Profit with Practical examples will discuss in Article no. 14 in detail

Following are the few examples:

1. The taxable income of Sohrab Spinning Mills Limited. Computed as per the provisions of Income-tax Act is Rs. 8,40,000. Book profit of the company computed as per the provisions of section 115JB is Rs. 18,40,000. What will be the tax liability of Sohrab Spinning Mills Ltd. (ignore cess and surcharge)?

The tax liability of a company will be higher of: (i) Normal tax liability, or (ii) MAT. Normal tax rate applicable to an Indian company is 30% (plus cess and surcharge as applicable). Tax @ 30% on Rs. 8,40,000 will amount to Rs. 2,52,000 (plus cess). Book profit of the company is Rs. 18,40,000. MAT liability (excluding cess and surcharge) @ 18.50% on Rs.18,40,000 will come to Rs. 3,40,400. Thus, the tax liability of Sohrab Spinning Mills Ltd. will be Rs. 3,40,400 (plus cess as applicable) being higher than the normal tax liability.

2. The taxable income of Shreyan Paper Mills. Ltd. computed as per the provisions of Income-tax Act is Rs. 28,40,000. Book profit of the company computed as per the provisions of section 115JB is Rs. 18,40,000. What will be the tax liability of Shreyan Paper Mills Ltd. (ignore cess and surcharge)?

The tax liability of a company will be higher of: (i) Normal tax liability, or (ii) MAT. Normal tax rate applicable to an Indian company is 30% (plus cess and surcharge as applicable). Tax @ 30% on Rs. 28,40,000 will amount to Rs. 8,52,000 (plus cess). Book profit of the company is Rs. 18,40,000. MAT liability (excluding cess and surcharge) @ 18.50% on Rs.18,40,000 will come to Rs. 3,40,400. Thus, the tax liability of Shreyan Paper Mills Limited. will be Rs. 8,52,000 (plus cess as applicable), being higher than the MAT liability.

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 18.50% of its book-profit + surcharge (SC) + education cess (EC) + secondary and higher education cess. 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. However, 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.

Non applicability of MAT

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—

  • 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 [As amended by Finance Act, 2017]
  • 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.

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’) 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 subsection, such excess amount shall be ignored.

Adjustment of carried forward MAT credit:

A company is entitled to claim MAT credit i.e. excess of MAT paid over the normal tax liability. 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.

Period for which MAT credit can be carried forward:

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. In other words, if MAT credit cannot be utilized by the company within a period of 15 years (immediately succeeding the assessment year in which such credit was generated), then such credit will lapse. No interest is paid to the taxpayer in respect of such credit.

Report from chartered accountant : Every company to whom the provisions of section 115JB applies is required to obtain a report from a chartered accountant in Form No. 29B certifying that the book profit has been computed in accordance with the provisions of section 115JB. The report should be obtained on or before due date of filing the return of income. Audit report in Form No. 29B shall be filed electronically.

Calculation of MAT

Before proceeding on how MAT is calculated, first provisions related to MAT calculation is important to learn:

 Income tax Payable shall be the higher of the following amounts:

  • Tax on total income computer as per the normal provisions of the Income Tax Act (25% on domestic companies)
  •  Tax rate is 25% if turnover or gross receipts of the domestic company in the previous year doesn’t exceed Rs. 250 crore
  • for Assessment year 2017-18 , tax rate would be 29% where turnover or gross receipt of the company does not exceed Rs. 50 crore.
  • Add:

 a) Surcharge: The amount of income-tax shall be increased by a surcharge at the rate of 7% of such tax, where total income exceeds one crore rupees but not exceeding ten crore rupees and at the rate of 12% of such tax, where total income exceeds ten crore rupees. However, the surcharge shall be subject to marginal relief, which shall be as under:

(i) Where income exceeds one crore rupees but not exceeding ten crore rupees, the total amount payable as income-tax and surcharge shall not exceed total amount payable as income-tax on total income of one crore rupees by more than the amount of income that exceeds one crore rupees.

(ii) Where income exceeds ten crore rupees, the total amount payable as income-tax and surcharge shall not exceed total amount payable as income-tax on total income of ten crore rupees by more than the amount of income that exceeds ten crore rupees.

b) Education Cess: The amount of income-tax and the applicable surcharge, shall be further increased by education cess calculated at the rate of two per cent of such income-tax and surcharge.

c) Secondary and Higher Education Cess: The amount of income-tax and the applicable surcharge, shall be further increased by secondary and higher education cess calculated at the rate of one per cent of such income-tax and surcharge.

  • Cess: 4% of corporate tax
    Surcharge: Taxable income is more than 1Cr. but less than 10Cr.: 7%
    Taxable income is more than 10Cr. :12%
  • Less Marginal Relief,
  • if total income exceeds Rs.1 crore {Formula: Tax on Rs. 1 crore + (Total Income – Rs. 1 crore)}
  • Tax on total income computer under MAT provisions (at present 18.5% + cess)
    • Add Surcharge: If total income exceeds Rs. 1 crore

Less Marginal Relief, if total income exceeds Rs.1 crore {Formula: Tax on Rs. 1 crore + (Total Income – Rs. 1 crore)}

XYZ Ltd. has given you the following figures to calculate the tax payable for Assessment Year 2019-20.

  • Taxable Income as per normal provision of Income Tax Act – Rs. 50,00,000
  • Book Profits as per section 115JB – Rs. 1,01,00,000

First of all calculate tax as per normal provisions of Income Tax

  • Tax Payable @ 25% plus edu cess of 4% – 26% of 50,00,000 = Rs. 13,00,000
  • No Marginal Relief, since the income does not exceed Rs. 1 crore.

Now compute tax payable as per MAT provisions

  • Tax payable @ 18.5% + Surcharge @ 7% + Cess @ 4 % – 20.58% of Rs. 1,01,00,000 = Rs. 20,78,580.
  • Since Income Exceeds Rs. 1 crore, Marginal Relief is to be calculated (i.e. the amount of tax and surcharge cannot exceed the tax calculate under Marginal Relief)

Hence, Tax Payable by Company before marginal relief = Rs. 20,78,500

There is a credit of MAT of Rs. 7,78,580 before marginal relief, which can be carried forward to  15 assessment years.

MAT Credit under Section 115JAA

A tax credit scheme is introduced by which MAT paid can be carried forward for set-off against regular tax payable during the subsequent  years period  subject to certain conditions, as under:-

  • When a company pays tax under MAT, the tax credit earned by it shall be an amount which is the difference between the amount payable under MAT and the normal tax. Normal tax in this case means the tax payable on the basis of normal computation of total income of the company.
  • MAT credit will be allowed carry forward facility for a period of 15 assessment years immediately succeeding the assessment year in which MAT is paid. Unabsorbed MAT credit will be allowed to be accumulated subject to the 15 year carry forward limit.
  • In the assessment year when regular tax becomes payable, the difference between the regular tax and the tax computed under MAT for that year will be set off against the MAT credit available.
  • In case of conversion of company into a Limited Liability Partnership under the Limited Liability Partnership Act, 2008, MAT credit available in hands of company shall not be allowed to the LLP.
  • The credit allowed will not bear any interest.

MAT credit can be better explained with the help of an illustration. So let’s try to understand it with the help of an example:

Asst Year Tax Payable under MAT Tax Payable as per normal provisions Actual Tax payable* Tax Credit Available u/s 115JAA Tax Credit Set off/ adjusted Total Tax Credit Available
2012-13 11,43,300 3,09,000 11,43,300 834,300 8,34,300
2013-14 9,14,640 4,94,400 9,14,640 4,20,240 12,54,540
2014-15 13,33,850 15,75,900 13,33,850 2,42,050 10,12,490
2015-16 5,71,650 1,54,500 5,71,650 4,17,150 14,29,640
2016-17 28,01,085 48,66,740 34,37,110 14,29,640**
  • Tax Paid for the relevant assessment year cannot be less then tax computer in column
  • Credit can be allowed to be adjusted to the maximum extent of total credit available
  • No interest is payable on the tax credit available under section 115JAA.

As mention above Computation of Book Profit along with various practical examples and its applicability on IND AS will discuss in Article No. 14.

This Article is restricted to Basic framework of MAT.

If you have any doubt or question in mind then you can contact with us on 9780754114, or you can further write us on vivekmalhotra492@gmail.com.

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