A lot of companies in India either avoid paying taxes or minimise their tax liability by taking advantage of various Income Tax provisions such as deductions, exemptions, depreciations, etc.
These companies are often known as ‘Zero Tax Companies’.
Since the government heavily relies on taxes to spend money on various welfare schemes it runs in the country, the Finance Ministry introduced the concept of Minimum Alternate Tax from the assessment year 1988-89.
In this article, we will talk in detail about what Minimum Alternate Tax is, who it applies to, and how it’s calculated. However, before that let’s understand what book profit is as it’s closely related to Minimum Alternate Tax.
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What is Book profit?
A company’s book profit is the net profit as shown in the profit and loss statement of a particular financial year. While calculating the book profit, certain expenses and incomes are added or removed from the net profit.
Here is the detailed structure of how book profit is calculated:
Additions:
- Incomes tax paid or payable
- Amounts carried to any reserves
- Unascertained liabilities
- Losses of subsidiary companies
- Dividends paid or proposed to shareholders
- Expenditure related to incomes which are exempt under section 10 [other than section 10(38)] section 11 and section 12
- Depreciation debited in Profit and Loss statement
- Deferred tax
- Depreciation of assets
Subtractions:
- Amount withdrawn from any reserve or provision if credited to P&L account
- Income that is exempted under section 10, (except section 10(38)), section 11, and section 12
- Amount of depreciation debited to statement of profit and loss (excluding the depreciation on revaluation of assets)
- Income of the taxpayer on which no income tax is payable as per section 86
- Income on royalty
- Amount of brought forward loss or unabsorbed depreciation, whichever is less as per books of account
- Profits of a sick industrial company till its net worth becomes zero or positive
- Deferred tax, if credited to the statement of profit and loss
Apart from these there are many other additions and subtractions that is required to arrive at the book profit.
What is Minimum Alternate Tax?
Minimum Alternate Tax (MAT) was introduced so that Companies and LLPs that earn profit and still don’t pay tax, can come under the income tax net and pay a minimum tax every financial year.
According to Section 115JB of the Income Tax Act, every company, domestic or foreign, is required to pay MAT at the rate of 15% of its book profit.
Before MAT was brought in, a lot of companies didn’t have to pay taxes as their income according to the calculations of the Income Tax act was either nil, negative, or insignificant.
As per the laws governing MAT, a company’s tax liability will be one of the following, whichever is higher:
- Tax calculated as per the normal provisions of the Income tax Law, which is when tax is computed on the taxable income of the company.
- Tax computed at the rate of 15% (plus surcharge and cess as applicable) on its book profit (This is called MAT)
Example 1: Let’s calculate the tax liability of a company XYZ Pvt. Ltd. that has a turnover of more than Rs 400 crore.
Suppose the taxable income of XYZ Pvt. Ltd. according to the calculations based on the Income Tax Act is Rs 7,00,000. As per section 115JB, its book profit is Rs 17,00,000.
The normal tax rate applicable to XYZ will be 30% on Rs 7,00,000. It comes up to Rs 2,10,000.
The tax liability according to MAT will be calculated at 15% on Rs 17,00,000, which comes up to Rs 2,55,000.
Since the calculation as per MAT is higher than normal tax, XYZ Pvt. Ltd. will have to pay MAT of Rs 2,55,000.
Example 2: Let’s calculate the tax liability of a company ABC Pvt. Ltd. that has a turnover of more than Rs 400 crore.
Suppose the taxable income of ABC Pvt. Ltd. according to the calculations based on the Income Tax Act is Rs 15,00,000. As per section 115JB, its book profit is Rs 8,00,000.
The normal tax rate applicable to ABC will be 30% on Rs 15,00,000. It comes up to Rs 4,50,000.
The tax liability according to MAT will be calculated at 15% on Rs 8,00,000, which comes up to Rs 1,20,000.
Since the calculation as per normal tax is higher than MAT, ABC Pvt. Ltd. will have to pay Rs 1,20,000.
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Who is MAT applicable to?
According to section 115JB, every company will have to pay Minimum Alternate Tax, if its payable tax including surcharge and cess, for a financial year is less than 15% of its book profit + surcharge + health and education cess.
However, Minimum Alternate Tax will not be applicable to the following companies:
- India-based companies that have opted for tax regimes under Section 115 BAA or Section 115 BAB
- Any income accruing or arising to a company from the life insurance business
- Shipping companies, whose income tax is determined by the net tonnage of its fleet
What is MAT credit?
When a company pays taxes as per MAT, it is entitled to claim the excess amount it paid over the normal tax liability.
Example: The tax liability of XYZ Pvt. Ltd for the financial year 2022-23 under the normal provisions of the Income Tax Act is Rs. 2,10,000. On the other hand, its tax according to the calculations for MAT is Rs. 2,55,000.
Since the company paid the higher amount of tax, it can claim Rs 45,000, which is the excess amount that it paid, as per the provisions of section 115 JAA.
Similarly, the company can adjust the excess tax that it paid to pay taxes for the next financial year. Alternatively, it can also claim the partial credit of the excess tax that it paid.
For example, XYZ can claim Rs 10,000 and adjust the remaining amount to pay the subsequent year’s taxes.
Frequently Asked Questions
Question: What is a MAT report?
Answer: Those companies that pay Minimum Alternate Tax must fill out a MAT report as mentioned in Form 29B.
Question: Do companies that operate in Special Economic Zones (SEZ) also have to pay Minimum Alternate Tax?
Answer: In its initial avatar, companies that earned profit from activities in SEZs didn’t have to pay MAT. The rules were changed in 2011 and all companies that had operations in SEZs and earned profit from business there were brought into the MAT fold.
Question: What is Alternative Minimum Tax?
Answer: Similar to Minimum Alternate Tax, which is applicable to companies, Alternative Minimum Tax (AMT) applies to individuals who claim deductions under section 80 (H), section 35 AD, and section 10 AA.
