Minimum Alternate Tax – understand with examples (Complete Details)

Everything You want to know about Minimum Alternate Tax. MAT stands for Minimum Alternate Tax and AMT stands for Alternate Minimum Tax. Initially the concept of MAT was introduced for companies and progressively it has been made applicable to all other taxpayers in the form of AMT. In this part you can gain knowledge about various provisions relating to MAT and AMT. First of all we will understand the provisions of MAT and thereafter the provisions of AMT.

Minimum Alternate Tax Amendments

As a retrospective amendment w.e.f. 01/04/2001, For the removal of doubts, it is hereby clarified that the provisions of section 115JB shall not be applicable and shall be deemed never to have been applicable to an assessee, being a foreign company, where its total income comprises solely of profits and gains from business referred to in section 44B or section 44BB or section 44BBA or section 44BBB and such income has been offered to tax at the rates specified in those sections

2. Rate of Cess for Normal Tax as well as MAT shall be 4% HEC instead of 3% EC.

3. The normal rate of tax for Domestic Companies is 30%. However, w.e.f. A.Y. 19-20, if the turnover of a domestic company does not exceed 250 crore in P.Y. 16-17, rate of tax shall be 25%.

Further, w.e.f. A.Y. 17-18 following section 115BA was introduced in the Act, wherein assessee company has an option to pay tax @ 25% if the following conditions are satisfied:

  • i) The Company is a domestic company,
  • ii) It has been set up and registered on or after 1st March, 2016,
  • iii) It is engaged in the business of manufacture or production of any article or thing and not engaged in any other business,
  • iv) In its total income the company has not claimed any benefit of SEZ deduction u/s 10AA, accelerated or additional depreciation, investment allowance, expenditure for scientific research or any income related deduction other than Section 80JJAA

The option is furnished in the prescribed manner before the due date of filing return of income. However, once the option is exercised it cannot be changed or withdrawn for any year in future. Further, other income of the company for which special rates of tax have been prescribed, shall continue to be taxed at such prescribed special rates.

4. W.e.f. A.Y. 19-20, In case of a company against whom an application for corporate insolvency resolution process has been admitted by the Adjudicating Authority under the Insolvency and Bankruptcy Code, 2016, BOTH the brought forward loss as well as the unabsorbed depreciation as per Books of Accounts shall be adjusted on the less side in the calculation of Book Profit u/s 115JB.

Objective of levying Minimum Alternate Tax

At times it may happen that a taxpayer, being a company, may have generated income during the year, but by taking the advantage of various provisions of Income-tax Law (like exemptions, deductions, depreciation, etc.), it may have reduced its tax liability or may not have paid any tax at all. Due to increase in the number of zero tax paying companies, MAT was introduced by the Finance Act, 1987 with effect from assessment year 1988-89. Later on, it was withdrawn by the Finance Act, 1990 and then reintroduced by Finance (No. 2) Act, 1996, wef1-4-1997.

The objective of introduction of MAT is to bring into the tax net “zero tax companies” which in spite of having earned substantial book profits and having paid handsome dividends, do not pay any tax due to various tax concessions and incentives provided under the Income-tax Law.

Since the introduction of MAT, several changes have been introduced in the provisions of MAT and today it is levied on companies as per the provisions of section 115JB.

Basic provisions of Minimum Alternate Tax

As per the concept of MAT, the tax liability of a company will be higher of the following:

  • Tax liability of the company computed as per the normal provisions of the Income-tax Law, i.e., tax computed on the taxable income of the company by applying the tax rate applicable to the company. Tax computed in above manner can be termed as normal tax liability.
  • Tax computed @ 18.5% (plus surcharge and cess as applicable) on book profit (manner of computation of book profit is discussed in later part). The tax computed by applying 18.5% (plus surcharge and cess as applicable) on book profit is called MAT.

Example

The taxable income of Essem Minerals Pvt. Ltd. computed as per the provisions of Income-tax Act is Rs. 8,40,000. Book profit of the company computed as per the provisions of section 115JB is Rs. 18,40,000. What will be the tax liability of Essem Minerals Pvt. Ltd. (ignore cess and surcharge)?

Answer  The tax liability of a company will be higher of: (i) Normal tax liability, or (ii) MAT. Normal tax rate applicable to an Indian company is 30% (plus cess and surcharge as applicable). Tax @ 30% on Rs. 8,40,000 will amount to Rs. 2,52,000 (plus cess). Book profit of the company is Rs. 18,40,000. MAT liability (excluding cess and surcharge) @ 18.50% on Rs.18,40,000 will come to Rs. 3,40,400.

Thus, the tax liability of Essem Minerals Pvt. Ltd. will be Rs. 3,40,400 (plus cess as applicable) being higher than the normal tax liability

Example 2

The taxable income of SM Energy Pvt. Ltd. computed as per the provisions of Income-tax Act is Rs. 28,40,000. Book profit of the company computed as per the provisions of section 115JB is Rs. 18,40,000. What will be the tax liability of SM Energy Pvt. Ltd. (ignore cess and surcharge)?

Answer 

The tax liability of a company will be higher of: (i) Normal tax liability, or (ii) MAT. Normal tax rate applicable to an Indian company is 30% (plus cess and surcharge as applicable). Tax @ 30% on Rs. 28,40,000 will amount to Rs. 8,52,000 (plus cess). Book profit of the company is Rs.18,40,000. MAT liability (excluding cess and surcharge) @ 18.50% on Rs.18,40,000 will come to Rs. 3,40,400.

Thus, the tax liability of SM Energy Pvt. Ltd. will be Rs. 8,52,000 (plus cess as applicable), being higher than the MAT liability

Applicability and non-applicability of MAT

As per section 115JB, every taxpayer being a company is liable to pay MAT, if the Income tax (including surcharge and cess) payable on the total income, computed as per the provisions of the Income-tax Act in respect of any year is less than 18.50% of its book-profit + surcharge (SC) + education cess (EC) + secondary and higher education cess.

From the above it can be observed that the provisions of MAT are applicable to every company whether public or private and whether Indian or foreign. However, as per section 115JB(5A) MAT shall not apply to any income accruing or arising to a company from life insurance business referred to in section 115B. Further, as per provisions of Section 115V-O the provisions of MAT will not apply to a shipping income liable to tonnage taxation, i.e., tonnage taxation scheme as provided in section 115V to 115VZC.

Meaning of book profit

As per Explanation 1 to section 115JB(2) “book profit” for the purposes of section 115JB means net profit as shown in the P & L Account prepared in accordance with Schedule VI of the Companies Act [now Schedule III to the Companies Act, 2013] as increased and decreased by certain items prescribed in this regard. The items to be increased and decreased are as follows :

Computation of book profit

Particulars Amount
Net profit as per Profit & Loss A/c prepared in accordance with Schedule VI to the Companies Act[now Schedule III to the Companies Act, 2013] XXXXX
Add : Following items (if they are debited to the P & L A/c)
Income-tax paid/payable and the provision thereof (*) XXXXX
Amounts carried to any reserves by whatever name called (Other than reserve specified under Section 33AC) XXXXX
Provisions for unascertained liabilities XXXXX
Provisions for losses of subsidiary companies XXXXX
Dividends paid/proposed XXXXX
Expenditure related to incomes which are exempt under section 10 [other than section 10(38)] section 11 and section 12 XXXXX
Amount of depreciation debited to P & L A/c XXXXX
Deferred tax and the provision thereof XXXXX
Provision for diminution in the value of any asset XXXXX
The amount standing in revaluation reserve relating to revalued asset on the retirement or disposal of such an asset if not credited to profit and loss account XXXXX
Less : Following items (if they are credited to the P & L A/c)
Amount withdrawn from any reserve or provision if credited to P&L account (**) XXXXX
Incomes which are exempt under section 10 [other than section 10(38)] section 11 and section 12 XXXXX
Amount of depreciation debited to P&L account (excluding the depreciation on revaluation of assets) XXXXX
Amount withdrawn from revaluation reserve and credited to P&L account to the extent it does not exceed the amount of depreciation on revaluation of assets XXXXX
Amount of brought forward loss or unabsorbed depreciation, whichever is less as per books of account XXXXX
Profits of a sick industrial company till its net worth becomes zero/positive XXXXX
Deferred tax, if credited to P&L account XXXXX
Book profit to be used to compute MAT XXXXX

(*) The amount of Income-tax shall include:

  • i. Any tax on distributed profits under section 115-O (dividend distribution tax – i.e., DDT) or tax on distributed income under section 115R;
  • ii. Any interest charged under this Act;
  • iii. Surcharge, if any, as levied by the Central Acts from time-to-time;
  • iv. Education Cess on Income-tax, if any, as levied by the Central Acts from time-to-time; and
  • v. Secondary and Higher Education Cess on Income-tax, if any, as levied by the Central Acts from time-to-time.

(**) Withdrawals made from reserves created or provisions made on or after the 1-4-1997, shall be deducted only if the book profit of the year of creation of such reserve has been increased by the amount transferred to such reserve or provisions (out of which the said amount was withdrawn).

For example, Governmental grants relatingto depreciable assets are credited to special reserve (i.e., not to P&L account) in the year of receipt and a portion of such grant is transferred from that reserve to P&L account over the life of the asset in proportion to depreciation charged. In the year in which these grants were credited to special reserve, they had not been added to net profit for calculation of book profit subjected to MAT. Therefore, in the year of transfer to P&L the amounts so transferred shall not be reduced from net profit while calculating book profit for the purpose of MAT.

MAT credit

As discussed in earlier part, a company has to pay higher of normal tax liability or liability as per MAT provisions. If in any year the company pays liability as per MAT, then it is entitled to claim credit of MAT paid over and above the normal tax liability in the subsequent year(s).The provisions relating to carry forward and adjustment of MAT credit are given in section 115JAA.

Example

The tax liability of Essem Minerals Ltd. for the financial year 2014-15 under the normal provisions of the Income-tax Act is Rs. 8,40,000 and the liability as per the provisions of MAT is Rs. 10,00,000. Will the company be entitled to claim any MAT credit in the subsequent year(s) as per the provisions of section 115JAA?

Answer

A company paying MAT is entitled to claim the credit of MAT paid in excess of normal tax liability. In this case the liability of Essem Minerals Ltd. for the year 2014-15 under the normal provisions is Rs. 8,40,000 and as per the provisions of section 115JB it is Rs. 10,00,000 (which is higher than normal tax liability) and, hence, the company has to pay Rs. 10,00,000, i.e., liability as per MAT provisions

As per section 115JAA, if in any year a company pays its tax liability as per MAT, then it can claim MAT credit being the excess MAT paid over the normal tax liability. In this case, as the liability of MAT is higher, and, hence, the company will be entitled to claim MAT credit of Rs. 1,60,000 (being excess of MAT over normal tax liability of Rs. 8,40,000).

Adjustment of carried forward MAT credit

As discussed earlier, a company is entitled to claim MAT credit i.e. excess of MAT paid over the normal tax liability. The credit of MAT can be utilised by the company in the subsequent year(s). The credit can be adjusted in the year in which the liability of the company as per the normal provisions is more than the MAT liability. The set off in respect of brought forward MAT credit shall be allowed in the subsequent year(s) to the extent of the difference between the tax on its total income as per the normal provisions and as per the MAT provisions.

Period for which MAT credit can be carried forward

As discussed earlier, the company can carry forward the MAT credit for adjustment in subsequent year(s), however, the MAT credit can be carried forward only for a period of 10 years after which it will lapse. In other words, if MAT credit cannot be utilised by the company within a period of 10 years (immediately succeeding the assessment year in which such credit was generated), then such credit will lapse. No interest is paid to the taxpayer in respect of such
credit.

Report from chartered accountant

Every company to whom the provisions of section 115JB applies is required to obtain a report from a chartered accountant in Form No. 29B certifying that the book profit has been computed in accordance with the provisions of section 115JB. The report should be obtained on or before due date of filing the return of income.Audit report in Form No. 29B shall be filed electronically.

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