Minimum Alternate Tax (MAT) is a taxation policy which was launched in India under the Finance Act of 1987, vide Section 115J of the Income Tax Act, 1961 (IT Act), to help in the taxation of zero tax companies. Zero Tax Companies are those companies that try to evade taxation by showing zero or insignificant income.
MAT was introduced to make such companies liable to pay taxes to the government, by considering some percentage of their book profit to be the taxable income. The primary purpose of MAT is to strive forward in reducing tax defaulters from avoiding the taxes payable. Minimum Alternate Tax becomes applicable when the determined taxable income for companies as per the normal provisions of the Income Tax Act tends to be less than 18.5% of the companies’ book profits.
The Nature of Minimum Alternate Tax
Over the years the rate of MAT has progressively increased from 7.5% in 2000 to 18.5% in 2015. Tax is computed by applying 18.5% inclusive of surcharge and Cess added to the book profit. The normal tax rate which is applicable to Indian companies is 30%, which is expected to be reduced to 25% by 2019. MAT imposes a higher taxation compared to the normal tax liability of the companies (had they been honest in paying the correct taxes).
All corporate entities irrespective of public or private corporations will be taxed with MAT if it falls under Zero Tax Companies. MAT is not applicable for life insurance business and shipping companies whose income are taxed as per the tonnage taxation provided in section 115V to 115VZC of the Income Tax Act.
Alternate Minimum Tax is like MAT but this is applied to individuals and non-corporate entities. The tax rate of AMT is the same as MAT which is, 18.5%.
The Indian government consistently strives to broaden the taxpayer's type to check that individuals and companies who have earnings above the exemption limit do not fool the law by evading taxes. Taxes which must be paid by entities are categorized either as a direct tax or indirect tax. Minimum Alternate Tax falls under the category of indirect tax.
Distinguished Attributes of Minimum Alternate Tax
In India, there are many companies that pay nil taxes despite making high profit and generating big turnovers. The companies escape taxation by giving considerable dividends to the company’s shareholders. The nil tax usually is the result of several exemptions, deductions, and incentives provided to entities because they meet certain criteria to avail these benefits. This is when MAT comes in and sees that companies that can easily pay taxes will not escape the payment of income tax.
Variations between Book Profit and Income Tax Profit
The book profit earned by a company is determined under Companies Act, 2013. Book profit accounts the rate of devaluation and deductions which are allowed. Income Tax Profit, on the other hand, is calculated as per the Act of the Income Tax Policy. In Income Tax Profit, various incentives and deductions can be allowed from the profit of the company.
What is MAT Credit?
Sometimes companies paying the minimum alternate tax instead of the regular tax make an extra payment of taxes (more than which is levied). These amounts are credited back to the company as a Tax credit.
MAT credit can basically be defined as
MAT Credit = Tax calculated under the general provisions of the Income Tax Act - Tax calculated under the provisions of the MAT Act.
Companies can carry forward the excess of the tax credit to the financial year in which they are liable to pay tax as per the general provisions of the Income Tax Act. MAT credit can be naturally carried forward for 10 consecutive assessment years.
Relevance of MAT in Special Economic Zones (SEZs)
When MAT was first introduced by the government of India, its rule wasn’t applicable to profits gained by entities operating businesses in Special Economic Zone. But, this rule was later revised in 2011 and now every company irrespective of operating a business and earning profits at SEZs are applicable for MAT, under Section 115JB.
The Scope of Minimum Alternate Tax in India
Ever since MAT has been introduced in India, the government have been under the heat, with taxpayers giving mixed reviews about the nature of its policy. There have been debates to make section 115JB more flexible and lenient. The Indian government, therefore, announced the establishment of a special committee to analyze various ways through which there will be a resolution to all MAT payment related issues. Currently, the committee is dedicated to bringing a resolution on MAT demands on foreign institutional investors. The committee is, however, making every effort to resolve the domestic issues on MAT payment by turning it into a more holistic and regulated policy.