What is Minimum Alternate Tax (MAT) - Complete Details
MAT (Minimum Alternate Tax) is a preventive mechanism for tax evasion implemented by Income Tax Department. This article will throw light on every important detail, which you need to know about MAT.
What is MAT?
MAT is a preventive mechanism levied under section 115JB, whereby all the companies have to abide by the income calculation as prescribed under the provision. This application is applicable to any and all the companies, be it domestic or foreign companies. This provision is also applicable to SEZ (Special Economic Zone).
Why MAT was introduced?
The main intention behind MAT introduction and implementation was that the companies should not get away with lesser or no income, even where such company has disposable income. Such a situation arises where the Income Tax allows beneficial provision which results in tax credits or deductions or exemptions. For e.g. where the companies have huge profits, but instead of paying taxes, companies prefer paying dividend.
How MAT is calculated?
MAT is calculated on book profits, which are adjusted profits as calculated under Income Tax provisions. The detailed procedure for computation of MAT is as follows.
- Computation of book profits
Book profits are just an adjusted figure which arises due to increase and decrease of certain items. The items which should be later added or deducted from net taxable income are listed as below.
1. The Following amounts are to be added back to net profit as calculated on profit and loss account (adhering to Income Tax provisions).
a. Income tax actually paid or payable along with the amount provided for the same. This includes Corporate Dividend Tax, interest on income tax etc.
b. Part of profit diverted to any reserve as an appropriation.
c. The Amount provided for the liabilities which are not yet ascertained. For e.g. provision for bad debts etc.
d. Provision for loss of subsidiary companies.
e. Dividends paid or proposed to be paid.
f. Expenses relatable to exempt income. For e.g. expenses related to exempt income under section 11 etc.
g. Depreciation debited to profit and loss account which includes depreciation relating to revaluation of
h. Deferred tax and provision.
i. Provision for diminution in asset value. For e.g. diminution in value of investments as required under AS (Accounting Standard) 13.
j. Revaluation reserve on retirement or disposal of the asset, where the same has not been credited to profit and loss account.
k. Expenses related to income in the nature of share of income from AOP or BOI (on which income tax is not payable under section 86)
l. Expenses related to income from capital gains as a result of securities transaction for FII (Foreign institutional Institution) which is not charged to STT. However, short term capital gains which are not liable for STT are still liable for MAT for FII.
2. The Following amounts are to be deducted from profits as calculated under Income tax provisions
a. The Amount withdrawn from reserves or provisions where such amount was earlier applied for increasing the book profits. (Including revaluation reserve and the amount credited to the P&L Account to the extent of depreciation.)
b. Exempt Income under section 10, 11 and 12 (not applicable to section 10AA and 10 (38).
c. Depreciation debited to profit and loss account excluding depreciation related to revaluation of assets.
d. Least of loss carried forward or depreciation brought forward. (Where one of both is nil, then nothing is allowed to be deducted in the context of book profits calculation)
e. Deferred tax credited to profit and loss accounts if any.
f. Income in nature of share of income from AOP or BOI, which is not liable for Income Tax.
g. Capital gains (other than short term capital gains not liable to STT) from transaction in securities for FII.
- MAT liability determination
MAT liability would be higher of following
1. Normal tax liability as determined under tax rates as prescribed by Income Tax laws
2. The Tax calculated @ 18.5% of book profit as arrived in first step. (This amount is to be increased by surcharge and education cess)
- MAT credit
Where tax as under 115JB (MAT) is more than the tax as calculated under income tax laws, then such higher tax would become payable. Such excess tax paid (difference of tax as per normal tax provision and MAT payable), would be available for set off in next 10 consecutive assessment years. This is MAT credit, which can be set off against normal tax liability in the next 10 assessment years.
Some recent changes to be noticed
- The FPIs (Foreign Portfolio Investors) are relieved from MAT levy if they don’t have PE (Permanent Establishment).
- Capital gains arising from the swap of shares in the SPV (Special Purpose Vehicle) for the business trust units are deferred till the actual sale of units.
The Government relaxed the MAT levy norms on foreign entities, keeping in mind the long term objective of FDI (Foreign Direct Investment). However, all others (including foreign companies who have PE in India), have to adhere to MAT provisions.