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Minimum Alternate Tax

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mat

The need of introducing Minimum Alternate Tax (MAT) was felt to monitor those companies that make large profits and pay the dividend to their shareholders but pay nil or negligible tax under the normal provisions of the Income Tax Act, 1961(Act), by deriving undue advantage of the numerous deductions and exemptions allowed under the Act. However, the exordium of MAT made all the companies to pay a minimum fixed percentage of the profits as Minimum Alternate Tax. It is worth to note that all the companies, including foreign companies fall under the ambit of MAT provision.

According to the section 115JB of the Act, every company is required to pay higher of the tax computed under the below two provisions:

  1. As per the Normal provisions: Tax liability calculated under the provisions of the act using tax rate 30% plus 4% cess plus surcharge, if applicable.
  2. As per the MAT provisions: Section 115JB of the act covers the provisions for calculating tax liability under MAT provisions. According to the provisions of Sec. 115JB, a company is required to pay 18.5 % of its book profits plus 4% cess plus a surcharge, if applicable. The tax rate has been amended to 15% with effect from AY 2020-21 (FY 2019-20).

How is MAT calculated?
The MAT a company is required to pay is equal to 18.5% (15% from AY 2020-21) of its book profits (plus surcharge and cess as applicable). Here, book profit means the net profit as per the statement profit & loss for the year as induced and reduced considering following items:

Additions to the Net Profit (If charged to the Profit and Loss Account)

  • Income Tax paid or payable, if any computed as per normal provisions of the income tax act.
  • Any transfer made to any reserve.
  • Dividend paid or proposed.
  • Any provision made for loss of its subsidiary company.
  • Depreciation and amortization including depreciation for revaluation of assets.
  • Amount or provision of deferred tax.
  • Provision(s) made for unknown and/or unascertainable liabilities e.g. provision for bad debts.
  • Expenses relating to any exempt income under sections 10,11,12 (except section 10AA and 10(38), meaning incomes under section 10AA & long term capital gain exempt under section 10(38) are subject to MAT).
  • Provision made for diminution in the value of any asset.

Deductions to the Net Profit (If credited to the Profit and Loss Account)

  • Withdrawals made out of any reserves or provisions, if any such amount is credited to the statement of profit and loss.
  • The amount of income to the extent to which any of the provisions of section 10, 11 & 12 except 10AA & 10(38) applies, if such amount is credited to the statement of profit and loss.
  • Withdrawals made out of revaluation reserve and credited to the statement of profit & loss to the extent of depreciation on account of revaluation of asset.
  • Brought forward losses or unabsorbed depreciation, whichever is lower as per the books of account. However, this loss shall not include the amount of depreciation (if loss brought forward or unabsorbed depreciation is nil then nothing shall be deducted).
  • Amount of Deferred Tax, if any such amount is credited to the statement profit & loss.
  • Amount of depreciation debited to the statement profit and loss Account (excluding the depreciation on revaluation of Assets).

Understanding what is MAT Credit?
According to the provisions of section 115JAA, where any amount is paid by way of MAT by a company, then the company becomes eligible to claim the credit of such tax paid in accordance with the provision of the aforesaid section.

Allowable Tax Credit: The amount of tax credit allowable can be computed as follows:

Tax paid as per MAT provisions of the Act xxx
less: Income tax payable under normal provisions of the Act (xxx)
MAT credit xxx

However, no interest shall be paid on the Tax credit by the Income Tax Department.

It is important to note that such tax credit can be carried forward for 15 assessment years from the year succeeding the assessment year in which such credit has become allowable. The MAT credit can be adjusted/set off in a year in which the company becomes liable to pay tax on the total income under the normal provisions of the Act. Further, the set off shall be allowed to the extent the difference between the tax payable on the total income according to the normal provision and the tax that would have been payable following the MAT provisions under the section 115JB.

The following illustration explains the MAT credit in a better manner. So let us try to understand how the MAT credit works with the help of below example:

(Amounts in Rs.)

Assessment Year Tax Payable as per normal provisions Tax Payable under MAT provisions Actual Tax payable* Tax Credit Available u/s 115JAA** Tax Credit  adjusted/ Set off*** Total Tax Credit Available
2016-17 5,00,000 8,00,000 8,00,000 3,00,000 3,00,000
2017-18 6,50,000 9,00,000 9,00,000 2,50,000 5,50,000
2018-19 7,00,000 10,00,000 10,00,000 3,00,000 8,50,000
2019-20 10,00,000 7,00,000 7,00,000 3,00,000 5,50,000
2020-21 11,00,000 6,00,000 6,00,000 5,00,000 50,000

 

* Actual tax payable is the higher of the tax payable as per normal provisions and tax payable under MAT provisions.

** MAT Credit available u/s 115JAA is the difference between tax payable under MAT and tax payable as per normal provisions.

*** MAT credit/set off is allowed only if the tax payable as per normal provisions exceeds the tax payable under MAT and to the extent of the difference between the two.

Here, at AJSH we do assist our clients in tax compliances of companies and related services. We will be happy to guide you in availing this. If you have any questions or want to know more about tax compliances and tax rates, kindly contact us.

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