Redundancy of Minimum Alternate Tax: A Missed Step towards Simplification

Abstract

The Minimum Alternate Tax (MAT) is a corporate tax mechanism in India designed to ensure that companies contribute a minimum amount of tax, even if their taxable income is reduced to negligible levels through deductions and exemptions. Initially introduced to curb tax avoidance, MAT has increasingly become redundant due to technological advancements, improved tax compliance, and structural changes in corporate taxation. This article critically examines the effectiveness of MAT in the current fiscal environment and explores whether its removal could lead to a more streamlined taxation system. Additionally, it assesses the implications of abolishing MAT considering global tax trends and international tax treaties mandating a minimum corporate tax rate. 

Introduction

Minimum Alternate Tax has been a significant topic of discussion in corporate taxation, with the redundancy of its provisions under the Income Tax Act being frequently questioned. As the government moves towards simplifying the taxation structure by eliminating deductions and introducing sunset clauses, the necessity of MAT has come under scrutiny.

The Minimum Alternate Tax (hereinafter referred to as ‘MAT’) has a complex and long-standing history in Indian tax law. Initially introduced under the Finance Act of 1987, MAT was designed to ensure that companies with substantial book profits but little to no taxable income, due to various exemptions and deductions, contributed to the country’s tax revenue. This provision was enforced from April 1, 1989, with the introduction of Chapter XIIB in the Income Tax Act of 1967. The intent behind MAT was highlighted in the memorandum to the bill, which stated: “Some companies are making huge profits but are not paying any substantial tax due to various deductions and concessions, while also managing their affairs in such a way as to avoid the payment of tax. The provisions have been introduced to make the tax system more progressive.”

However, these provisions were removed from the Income Tax Act in the Finance Bill of 1990, based on the argument that tax incentives and deductions had been rationalized, leading to an expanded tax base and eliminating the need for a minimum tax on companies. However, within just five years, the “alternative minimum tax” provisions were reintroduced under the Finance Act of 1995, as the concept of “zero-tax” companies had resurfaced. Companies were once again paying little to no tax despite generating significant profits and maintaining large revenue streams.

The 1995 provisions introduced a slightly different mechanism, incorporating a “credit system.” Under this framework, companies were required to pay a minimum of 30% of their book profits as tax. Any excess tax paid under MAT, compared to the normal tax computation, could be carried forward and used as a credit in future years.

However, this credit system was only applicable in future assessment years (AY) where the company’s tax liability, calculated under the regular provisions of the Income Tax Act, exceeded the tax calculated under MAT (30% of book profits). The credit was initially allowed for a period of five years. Subsequently, the Finance Bill of 2000 revised MAT provisions, reducing the required payment from 30% to 7.5% of book profits. This introduced a dual-tax-rate system, requiring companies to compute tax under both regular provisions and MAT, and then pay the higher amount. Additionally, the Finance Bill of 2000 discontinued MAT credit provisions, though companies could still carry forward previously accumulated credits for up to five years.

The credit mechanism was reintroduced in the Finance Bill of 2004, allowing credits to be carried forward for five years. Over time, this period was gradually extended—from five years to ten years, and later, in the Finance Bill of 2017, to fifteen years. This consistent extension in the credit period suggests that the government does not intend MAT to be a permanent tax liability for companies. Correspondingly, MAT rates also increased from 7.5% to 18.5% over the years before being reduced to 15% following reductions in corporate tax deductions and concessions. Currently, the corporate tax rate in India stands at 22% for domestic companies and 15% for new manufacturing units,

Globally, many countries have abolished MAT or similar provisions, but India had not considered this until recently. Speculation was rife that the Income Tax Bill of 2025 would either remove MAT or clarify ambiguities in its application. However, no policy change has been proposed so far.

These significant reforms to India’s corporate tax regime in recent years have rendered MAT increasingly redundant. With the government lowering the standard corporate tax rate to 22% for domestic companies and 15% for new manufacturing units (subject to certain conditions), the need for MAT has diminished. Moreover, many exemptions that previously allowed companies to avoid taxes are being phased out. As companies can no longer avail themselves of multiple deductions, the regular tax regime already ensures that businesses contribute to public revenues, minimizing the original rationale for MAT. 

The Way to Simplification

MAT is provided under Section 115JB (Section 206 of the Income Tax Bill 2025) which outlines a complex set of rules to determine the tax a company must pay for a particular financial year. Under MAT provisions, companies are required to compute tax based on book profits rather than taxable income (Book profits are the profits shown in a company’s profit and loss account for a financial year). However, for MAT purposes, book profits differ from usual entries due to specific additions and deductions prescribed by the Central Board of Direct Taxes (CBDT).

Entries debited in the books that must be added back:

1. Income tax paid or payable under normal provisions of the Income Tax Act.
2. Transfer made to any reserve.
3. Dividend proposed or paid.
4. Provision for the loss of subsidiary companies.
5. Depreciation, including depreciation due to revaluation of assets.
6. Amount/provision for deferred tax.
7. Provision for unascertained liabilities, e.g., provision for bad debts.
8. Expenses related to exempt income under Sections 10, 11, and 12 (except Sections 10AA and 10(38)).

Entries credited in the books that must be deducted:

1. Amount withdrawn from any reserves or provisions.
2. Income to which Sections 10, 11, and 12 apply (except Sections 10AA and 10(38)).
3. Amount withdrawn from the revaluation reserve and credited to the profit and loss account, to the extent of depreciation on revalued assets.
4. The lower of brought-forward losses or unabsorbed depreciation as per books of account (excluding depreciation).
5. Amount of deferred tax credited to the profit and loss account.
6. Depreciation debited to the profit and loss account (excluding depreciation on revalued assets).

Under MAT provisions, companies must pay the higher of the following two tax liabilities:

1. Tax liability under normal provisions of the Income Tax Act:
   • 30% tax rate plus 4% education cess and applicable surcharge.
   • 25% tax rate plus 4% cess and applicable surcharge for domestic companies with turnover or gross receipts up to Rs. 400 crores.
2. Tax liability under MAT (as per Section 115JB):
   • 15% of book profits plus 4% education cess and applicable surcharge (effective from AY 2020-21, FY 2019-20). 

In contrast, taxable income under normal provisions requires multiple adjustments for exemptions and deductions. Companies must perform dual tax calculations to determine the higher liability, significantly increasing compliance burdens, particularly for businesses with complex financial operations.

Further complicating matters is the adoption of Indian Accounting Standards (Ind AS). These new standards affect how companies recognize revenue, expenses, and deferred tax assets or liabilities, altering the book profits used for MAT calculations. Companies reporting under Ind AS must adjust for fair value measurements, which were not considered under previous norms. These adjustments can create unintended fluctuations in MAT liabilities, making compliance more cumbersome and uncertain.

Thus, the removal of MAT offers a dual benefit. Firstly, the companies would no longer need to calculate multiple tax liabilities, thereby reducing compliance costs. On the other hand revenue department would have a reduced burden of monitoring dual tax computations and verifying correct deductions and additions.

The flawed credit system

Currently, MAT credits can be utilized by companies for up to 15 years. This credit can only be availed when the MAT rate of tax is lower than the tax payable under other provisions of the Income Tax Act. However, there are two scenarios in which the MAT credit system fails or becomes ineffective.

First, when the MAT credit remains unutilized for many years, the actual value of the paid amount diminishes over time. For example, if tax was paid under MAT provisions in FY 2000-01 amounting to Rs. 10,000, its value, adjusted to the yearly Cost of Inflation Index (CII), would be Rs. 3,788 in FY 2015-16, leading to more than a 60% loss in the value of the actual tax paid under MAT. If the same calculation is done for 10 years, taxpaying entites would lose 50% of the value of the tax paid under MAT.

The necessity of this calculation arises from the fact that MAT credit has not been fully utilized by many corporate entities. In 2016-17, only around 14% of the total MAT paid by entities in India was utilized. Although the government claims that MAT is not meant to collect tax permanently, a significant portion of the revenue collected through MAT remains unutilized by companies. This situation persisted until the COVID-19 pandemic, after which the scenario surrounding MAT credit changed drastically as seen in the following.

When the MAT credit has been entirely utilized, the computation and payment of MAT tax under the Income Tax Act provisions become redundant. This occurs when the ratio of the MAT rate to the maximum corporate tax rate under normal provisions is close to one, effectively eliminating the applicability of MAT. For example, in 2018-19, the effective maximum MAT rate was 21.55%, while the maximum corporate tax rate under normal provisions was 34.94%, resulting in a ratio of 0.61. In contrast, in 2001-02, this ratio was 0.21. When this ratio approaches one, the MAT rate and actual tax rate become similar, rendering MAT provisions redundant. A potential solution to this issue is reducing the MAT rate to approximately half of the overall corporate tax rate.

Another scenario where MAT credit utilization has peaked is evident in recent trends. In FY 2020-21, the MAT credit received by the government was Rs. 18,830 crores, while the MAT credit claimed by companies was Rs. 18,897 crores—exceeding 100% of the MAT revenue collected by the government. This trend has continued, as seen in the latest budget receipts, where MAT credit received stood at Rs. 24,613 crores, while claims totalled Rs. 34,430 crores. The revenue outflow is projected to further increase to Rs. 8,352 crores in FY 2023-24. Notably, since FY 2017-18, MAT revenue has been consistently declining, eventually turning negative from FY 2020-21 onward.

Table 1: MAT Credit Claimed in the Last Ten Years, Budget Receipts archive

This shift is attributed to various amendments in corporate taxation, as previously discussed. These include increasing the MAT credit period from 10 to 15 years in 2018, reducing the MAT tax rate from 18.5% to 15% in the same year, and introducing multiple sunset clauses for corporate tax deductions. Collectively, these measures have led to declining MAT revenue while corporate claims on MAT credits have steadily increased.

This data underscores the redundancy of the MAT system in India’s corporate tax structure. Companies are now taxed more under the other Income Tax Act provisions than under MAT, leading to an increase in MAT credit claims. Consequently, companies are no longer escaping with negligible tax payments despite substantial profits, negating the very reason for implementing MAT in India and further solidifying the argument for its redundancy.

Scenario of Corporate Tax

Although changes in the MAT credit claiming system have impacted revenue streams, several other modifications in the corporate tax structure have significantly contributed to the redundancy of MAT provisions. To understand this, it is essential to analyze the effective tax rate of corporate entities. These entities are required to pay tax along with cess and other surcharges imposed by the government, wherever applicable.

The increase in MAT credit claims in FY 2018-19 can be attributed to the reduction in the MAT rate and an extension of the credit period. However, the continued rise in MAT credit claims in subsequent fiscal years can be explained by the decline in effective corporate tax rates from 37.2% in FY 2018-19 to 31.2% in FY 2019-20.

Furthermore, domestic companies in India now have the option to avail themselves of a lower tax rate of 22% (plus additional surcharge and cess). As a result, the application of MAT provisions is no longer necessary, exempting a substantial number of corporate entities from MAT requirements. This implies that once domestic companies opt for the reduced tax rate with minimal deductions and subsidies, MAT provisions become redundant in ensuring a minimum threshold of tax payment.

The list of corporate entities exempt from MAT also includes companies that do not have a permanent establishment (PE) in India. However, this exemption would not pose an issue once the BEPS (Base Erosion and Profit Shifting) action plans are implemented globally, as revenue sharing is a core objective of OECD’s Pillar 1. Additionally, companies deriving income from India exclusively through shipping businesses, mineral oil exploration, aircraft operations, etc., are also not subject to MAT provisions. Further, companies that have opted for the reduced tax rate scheme for new manufacturing entities are likewise excluded from MAT applicability.

The removal of various corporate entities from the purview of MAT highlights the increasing redundancy of MAT provisions. These developments further strengthen the argument for eliminating MAT from India’s corporate tax framework, making it evident that its continued existence is unnecessary in the evolving tax landscape.

Conclusion

In conclusion, the redundancy of MAT provisions in the current corporate tax system adds unnecessary complexity to India’s taxation framework. Businesses are required to navigate multiple tax structures, manage intricate accounting adjustments, and deal with long-term MAT credit management. These challenges not only escalate compliance costs but also introduce uncertainty and risks, thereby undermining the government’s objective of simplifying taxation and fostering investment.

The increasing utilization of MAT credits further indicates the declining relevance of the MAT system. As a result, MAT should not have been included in the Income Tax Bill 2025, however, the next policy change to the Income Tax Act needs to remove these provisions. Excluding MAT from the new tax framework would streamline corporate taxation, enhance revenue collection efficiency, and contribute to a more transparent and predictable tax system. Ultimately, removing MAT would mark a significant step toward a simplified and investor-friendly corporate tax environment in India.