Minimum Alternate Tax (MAT) in Income Tax

MAT tax, or Minimum Alternate Tax, ensures that enterprises pay a minimum tax amount to the Government of India (GoI). MAT income tax was introduced by the Finance Act 1996. 

The current MAT tax provisions were introduced in Finance (No.2) Act 1996, which took effect from 1st April 1997. 

The MAT income tax minimises the gap between tax accountability (as per income tax calculation) and book profit.

Here is a brief explanation of MAT tax, MAT tax rate and the nitty gritty involved in MAT income tax filing. 

What is MAT income tax?

MAT full form in tax is Minimum Alternate Tax. As per Section 115JB of the Income Tax Act, MAT is payable under the specific head of the Income Tax Act Direct Tax laws and is a type of corporate tax. 

The MAT tax was introduced considering companies that make huge profits and distribute dividends to shareholders. These businesses make negligible or no income tax payments per the normal Income Tax Act provisions. These companies claim deductions, exemptions, depreciation and more to reduce their tax liability. 

What is the difference between normal tax liability and MAT? 

Normal Tax Liability 

When you pay direct tax as per the normal income tax liability, it is called normal tax liability. This is as per the relevant tax rate to an enterprise’s taxable income. New rates were introduced for normal corporate taxes in September 2019. 

MAT in Income Tax

On an enterprise’s book profit, the MAT tax is applicable at 15 percent in addition to applicable surcharge and cess. The MAT tax rate was earlier 18.5 per cent on book profit. 

For enterprises that belong to the International Financial Services Centre (IFSC), the MAT tax is levied at 9 per cent (exclusive of applicable surcharge and cess). This MAT tax rate also applies to companies that derive their income solely in convertible foreign exchange. 

How is MAT tax calculated? 

MAT tax is calculated as per a company’s book profits. The book profits are the net profit in a company’s profit and loss account when increased or decreased with these items:

• Payable income tax (if any) calculated as per normal liability as per income tax provisions
• Transfer made to a reserve and dividends 
• Loss incurred by subsidiary companies 
• Depreciation 
• Provision or account of deferred tax 
• Unascertained liabilities such as bad debts 
• Expenses exempted as per Sections 10 [(except 10AA and 10(38)], 11 and 12 of the Income TaxAct

Who should pay MAT tax?

All companies, Indian or Foreign, are eligible to pay MAT tax if their payable income tax is less than 15 percent of book profit (excluding surcharge and cess). 

MAT income tax applies to both public and private sector companies. 

Which companies are exempted from MAT tax? 

A company earning income from a life insurance business or shipping income liable to tonnage taxation is exempted under Section 115JB (5A) of the Income Tax Act. 

Foreign companies are exempted from MAT tax if: 

• A specific country or assesse’s company (assessee)where GoIhas agreement as per Section 90 (1). It is also applicable for enterprise establishment agreed in a country as per Central Government in Section 90 (1). 
• Foreign companies not registered under this agreement are not required to seek registration since they were launched.
•  Foreign companies not liable to pay MAT under Section 115JB (4A) are exempted from MAT. These companies conduct business under Sections 40B, 40BB, 40BBA, and 40BBB. 

Conclusion

MAT is introduced to ensure that enterprises pay a minimum tax account to the government. These taxes are exempted for specific companies as per the norms mentioned above. 

Frequently Asked Questions