MAT was first introduced by Finance Act 1996, even after 13 years many find it difficult to understand what really MAT is. Here in this article I will try to ease the provision in simpler form hoping I can make the readers understand what really Minimum Alternate Tax is? First thing that should be kept aside is the fact that MAT provisions are only applicable to Companies either Private Limited or Public Companies.
Difference in Provision of Income Tax and Companies Act.
Income Tax Act as well as Companies Act both governs companies, and company needs to provide their Income Statement (Profit and Loss Account) and Balance Sheet to the Income Tax department while Preparing Tax Returns and also Final accounts are to be audited and submitted as Annual Returns under Companies Act. Now the Idea of setting the whole back ground is that the Taxable Income calculated under Income Tax Act is different than the profit calculated under Companies Act. You might wonder why? Let us understand this with a few examples.
Example 1: X Pvt. Ltd. is a company which have agricultural land on which it produces agricultural produce in any financial year. In same Financial Year it also lend his land for Film shooting and other cultural program. Now for calculating profit under Companies Act the total revenue agricultural as well as non-agricultural are taken into consideration where as in Income tax act only non-agricultural income and expenditure are considered for calculation of Taxable Income.
Example 2: If the X Ltd wants to Increase its authorized share capital and incurs any expenditure then the income tax act doesn’t allow such expense to be claimed while calculating taxable income where as such expenses are indirect expense in Profit and Loss account as per Schedule III of companies act.
From above examples I really tried just to clear the fact that how taxable Income and Profit Calculated can be different due to various provisions in respective acts.
To understand MAT or any section or provision for that matter under any law the best possible way is to understand the requirement of such law and intention of the lawmaker. We will try to understand what pushed government to introduce MAT.
Government usually Introduces huge tax benefits as exemptions and deductions for the assesses if the invest in certain way in, certain sector or in certain place to promote social and economic aspect of that place and sector, now what the companies motivated with the tax benefits started to mold themselves to fall in the criteria which lead them to obtain huge deduction ultimately reducing the taxable income very low or Nil for that matter whereas same companies were showing huge profit in their financial submitted in Annual returns. There is no violation or wrong doing to avail the tax benefit introduced by the government and this is the part of corporate tax planning only, but not to forget due to these decline on Taxable Income it was hitting hard on Governments Tax Collection. Hence it introduced a concept called MAT (Minimum Alternate Tax).
What is MAT?
I have used the full form on the heading only but again let’s start over, MAT stands for Minimum Alternate Tax introduced by Finance Act 1996 as section 115JB. From its name “Minimum Alternate Tax” we can conclude that provision of section 115JB asks companies to pay at the least given percentage (15% for FY 2019-20) of “Book Profit” if the company has no taxable income or tax calculated in regular income is less than such calculated MAT.
What is Book Profit?
“Book Profit” is basically the profit calculated as per Companies Act 2013 with few adjustment instructed in section 115JB.
We can conclude that section 115JB (MAT provision) can be said a sleeping provision which only comes into play if the calculated tax asper regular provision fall short in compared to the MAT calculated under section 115JB of Income Tax Act, the company will have pay MAT. So each time any company calculates the Tax under regular provision, such tax is to be compared with MAT calculated and company will have to pay highest of both of them. We will discuss about MAT credit in separate article.