Introduction to Minimum Alternate Tax (MAT)

Minimum Alternate Tax (MAT) is a tax mechanism introduced by the Indian Income Tax Act to ensure that companies paying minimal or no income tax through legal tax exemptions and incentives pay a certain minimum amount of tax to the government. The rationale behind MAT is to bring tax equity, ensuring profitable companies cannot entirely avoid paying tax by utilising various deductions.

Features of Minimum Alternate Tax

MAT has several key features that distinguish it from the regular income tax calculation:

• Applicability to Companies: MAT primarily applies to companies, including those with significant income but low taxable income due to exemptions, deductions, or incentives. It ensures these companies pay a minimum amount of tax.
• Calculation on Book Profits: Unlike regular income tax, which is calculated on taxable income, MAT is computed on a company’s book profits. Book profits are the net profits, as shown in the profit and loss account, adjusted according to specific provisions under Section 115JB of the Income Tax Act.
• MAT Rate: The rate of MAT has varied over time. My last update set it at 15% of book profits, plus applicable surcharge and cess. This rate is subject to change as per government regulations and budget announcements.
• Credit for MAT Paid: Companies paying MAT can claim credit for the tax paid over and above the regular income tax. This MAT credit can be carried forward and set off against future tax liabilities when regular tax exceeds MAT for a period not exceeding fifteen years.
• Mandatory for All Companies: All companies, including foreign companies with income accruing or arising in India, are subject to MAT. However, certain types of income, such as income from life insurance businesses, are exempt.
• Impact on Tax Planning: The imposition of MAT requires companies to revisit their tax planning strategies. Companies must now consider the MAT implications of their transactions and choose strategies that minimise their tax liability while remaining compliant with the tax regulations.
• Reporting Requirement: Companies must furnish a report from a Chartered Accountant certifying the book profit and the computation of MAT, ensuring transparency and compliance.
• Exemptions and Adjustments: Certain incomes are adjusted to calculate book profit, including the amount transferred to any reserves, revenue from the life insurance business, and dividends from foreign subsidiaries.
• Incentive for Investment: Despite its primary role as a minimum tax guarantee, MAT still allows for specific incentives and deductions, encouraging companies to invest in particular sectors or projects aligned with government priorities.

Tax Planning Under Minimum Alternate Tax

Tax planning under MAT requires careful consideration, as traditional tax-saving strategies might only sometimes result in tax savings under MAT. Businesses need to:

• Evaluate Tax Incentives: While planning investments and expenditures, consider their impact under MAT to ensure they are still beneficial.
• Leverage MAT Credit: Efficient use of MAT credit can significantly reduce tax liability over time. Ensure that the MAT credit is optimally claimed and utilised.

Minimum Alternate Tax (MAT) Calculation

Calculating MAT is a straightforward process but requires careful attention to detail. The steps involve

• Identification of Book Profit: Start with the net profit per the company’s financial statements.
• Adjustments: Add back expenditures and incomes exempt under the regular tax provisions but not exempt under MAT, and deduct incomes included in the financial statements but exempt under MAT.
• Apply MAT Rate: As of the last update, the current MAT rate is 15% plus applicable surcharge and cess. Add this rate to the adjusted book profit to arrive at the MAT liability.

How is Book Profit calculated in MAT?

Calculate book profit, which is the Net Profit per the P&L Account made per the guidelines of the Companies Act 2013. Once the profit has arrived, plus and minimum adjustments will be made. Let’s understand each adjustment: 

Plus Adjustments:

Plus adjustments are the ones that are added to the profits calculated. Some positive adjustments include

1. 1. Any income tax paid or payable or a provision created per the Income Tax Act.
   2. Other than reserves specified under Section 33AC, all reserves are added to the Profit.
   3. Any provision is made for the Bad and Doubtful debts, but the actual write-off is not added back. 
   4. Any dividend paid or proposed is added back.
   5. Provision created for unrealised or notional losses is added back
   6. Add back the depreciation charged for the year on the assets, including revaluation.
   7. Losses booked in the subsidiary company have been added back.
   8. Expenses related to exempt income under sections 10, 11, and 12 (excluding sec 10(38)) are subject to MAT. 
   9. When a foreign company earns income through capital gains transactions in securities or interest, royalty, or fees for technical services that are chargeable to tax at a specific rate, the amount of expenditure related to that income is calculated. If the income tax payable on this income is less than the Minimum Alternate Tax (MAT) rate, then the expenditure will be subject to the MAT rate.
   10. The amount of deferred tax and provision, therefore, is
   11. The amount of expenditure relatable to income by way of royalty in respect of patent chargeable to tax under section 115BBF.
   12. The revaluation reserve amount should be credited to the profit and loss account upon retirement or disposal of revalued assets.

Minus Adjustments:

These are the amounts to be deducted from the net profit. Some negative adjustments can be:

1. 1. The sum of money taken out from any reserve or provision.
   2. Minus the value of the deferred tax
   3. Depreciation excluding the depreciation on revaluation of assets
   4. Amount of income relating to an exemption under section 10,11,12 (except under section 10(38))
   5. The amount of income relatable to income by way of royalty regarding patent chargeable to tax under section 115BBF.
   6. The amount of notional gain.
   7. If a taxpayer’s share of income from an association of persons or body of individuals is exempted from income tax as per section 86, and if such exempted amount is included in the statement of profit and loss, then it will not be liable for income tax.
   8. If a foreign company receives income from capital gains transactions in securities, interest, royalty, or fees for technical services, and if the income tax payable on such income is less than the rate of Minimum Alternate Tax (MAT), then such income should be credited to the statement of profit and loss.
   9. The amount credited to the statement of profit and loss from the revaluation reserve will not exceed the depreciation resulting from the revaluation of assets.
   10. An industrial company is considered sick when its profits are consistently decreasing, decreasing its net worth. Once the company’s net worth reaches zero or turns positive, it is no longer considered sick.
   11. The amount of loss brought forward or unabsorbed depreciation, whichever is lower, as per the books of account (for companies other than those undergoing insolvency proceedings)
   12. The amount of Unabsorbed depreciation and losses brought forward (excluding unabsorbed depreciation) can be reduced from the book profits if a company’s application for corporate insolvency resolution process under IBC, 2016, has been admitted by AA.

Conclusion

MAT is essential in the Indian tax system, ensuring profitable companies contribute a fair minimum to the national exchequer. While it presents challenges in tax planning, it encourages transparency and equity. Navigating the MAT landscape through strategic tax planning and using MAT credits is crucial for optimising tax liabilities. Remaining informed and seeking professional advice is essential for compliance and fiscal prudence.

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