MINIMUMALTERNATE TAX

Kshitiz Gupta

Index• What is MAT?• Applicability• MAT Rate • How to compute MAT?• MAT Credit• Why in news?

Why MAT???........Reasons for its Introduction

To make sure that companies having large profits and declaring substantial dividends to shareholders but not paying tax to the Govt by taking advantage of the various incentives and exemptions provided in the Income-tax Act, pay a fixed percentage of book profit as minimum alternate tax.

Objective of MAT is to levy tax on “Zero tax companies”

Journey of MAT

SectionInserted

By Finance

Act

Applicable from

Applicable up to

80VVA 1983 AY 1984-85

AY 1987-88

115J 1987 AY 1988-89

AY 1990-91

115JA 1996 AY 1997-98

AY 2000-01

115JB 2000 AY 2001-02

Till DateSection 115JB

A company shall be liable to pay higher of tax computed under Income Tax Act provisions and tax computed under Sec 115JB

Applicability

Com

pani

es Domestic & Foreign

Private & Public

Section 25 Companies

(NPO)

The book profit shall mean the net profit as shown in the profit and loss account prepared in accordance with the

provisions of Part II and III of Schedule VI to the Companies Act, 1956 as adjusted by certain additions/deductions as

specified.

Book ProfitADDITIONS (If debited earlier)

1) Income-tax paid or payable, and the provision therefore

2) The amounts carried to any reserves, by whatever name ( Reserve for expense, excess provision & etc.)

3) Provisions for unascertained liabilities (like Provision for bad debts)

4) Provision for loss of subsidiary companies

5) Dividends paid or proposed

6) Expenditure related to exempt incomes u/s 10/11/12 [except 10(38)]

7) Depreciation amount

8) Amount of deferred tax and the provision therefore

Book Profit .

DEDUCTIONS (If credited earlier)

1) Amount withdrawn from any reserve or provision

2) Income exempt u/s 10/ 11/ 12 [except 10(38)]

3) The amount withdrawn from revaluation reserve and credited to the profit and loss account, to the extent it does not exceed the amount of depreciation

4) The amount of loss brought forward or unabsorbed depreciation, whichever is less as per books of account

5) The amount of deferred tax, if any such amount is credited to the profit and loss account

Computation of MAT

Step Procedure

1 Compute Total Income under Income Tax Act, 1961.

2 Compute Book Profit u/s 115JB.

3 Compute tax on Total Income at rates applicable for Companies under Income Tax Act.

4 Compute Tax at 18.5% on Book Profit.

5 Tax payable = Higher of Step 3 or Step 4

Numerical Example

Applicable when assessee paid tax on Book ProfitStep 1 Tax on Book Profit (18.5% of 2,00,000)=

Rs.3,81,100Step 2 Tax on Total Income (30% of 10,00,000) =

Rs.3,00,000Step 3 Step 1 > Step 2

MAT is payable

Total Income Rs. 10,00,000 Book Profit Rs.20,00,000

Not so cruel Government

MAT Credit

• In a given assessing year, when a company pays under the MAT provision as opposed to the general provisions of the Act, the excess of tax paid over and above the tax payable under the general provisions of the Act, accrues as a Tax Credit to the company

• MAT Credit = Tax as per MAT – Normal Tax Liability

This tax credit is allowed to be carried forward for ten assessment years succeeding the assessment year in which the credit became allowable.

MAT Credit)

A Numerical Illustration

10

MATHitting the headlines

• MAT was introduced to target domestic Indian companies which were suppressing their profits

• Applicability also on Foreign companies

• MAT applies to foreign companies with a permanent business presence in India, but not to foreign companies with shareholdings in Indian companies and no business presence

• In 2012, application of MAT was extended to foreign companies that do not have offices, employees or agents in India and FPIs.

• As a result of these decisions, it is no longer clear what connecting factors are necessary to bring a foreign company within the scope of MAT, thus creating uncertainty for FPIs owning shares in India Government has decided that FPIs will not be liable for MAT in respect of income arising after 1st April,2015

If you drive a car, I'll tax the streetIf you try to sit, I'll tax your seatIf you get too cold I'll tax the heatIf you take a walk, I'll tax your feet - The Beatles