Minimum Alternate Tax (MAT)

MAT or Minimum Alternate Tax is a provision in Direct tax laws to limit tax exemptions availed by companies, so that they mandatorily pay a minimum amount of tax to the government. As per Section 115JB, all companies are required to pay corporate tax at least equal to the higher of the following:

NOTE: MAT is levied at the lower rate of 9% (plus surcharge and cess, as applicable) for companies that are a unit of an International Financial Services Centre and derive their income solely in convertible foreign exchange.

MAT is calculated as 15% of the book profit of the tax assesse. Under existing rules, book profit is calculated as per Section 115JB of the Income Tax Act, 1961.

Minimum Alternate Tax calculation example:

The taxable income of ABC Company, not availing any tax exemptions/incentives, as per the provisions of the Income Tax Act, 1961 is Rs. 10 lakh. Thus, the normal tax liability of this company at the rate of 22% corporate tax will be Rs. 2.2 lakh plus cess and surcharge.

On the other hand, the book profit of this company as per Section 115JB is Rs. 20 lakh. Thus, MAT at the rate of 15% of book profit will be Rs. 3 lakh plus cess and surcharge.

Since, MAT is higher than the normal tax liability, the company will be liable to pay Rs. 3 lakh (plus cess and surcharge) as MAT and not Rs. 2.2 lakh (plus cess and surcharge).

As per Section 115JB (2), book profit means net profit in the statement of profit and loss prepared in accordance with Schedule III of the Companies Act, 2013. A number of costs/income are considered along with the profit and loss statement when calculating the book profit of a company. The following are some of the major ones:

Key Additions to Book Profit

The following will be added to arrive at the book profit amount if they are debited to the statement of profit and loss.

Key Deductions to book profit

The following deductions are applicable if they are credited to the statement of profit and loss:

For a detailed list and tutorial of additions and deductions with respect to book profit calculation, click here .

NOTE: The book profit computed as per provisions of section 115JB should be certified by a chartered accountant in Form no. 29B . The certification report should be obtained on or before the due date of ITR filing to avoid any penalties.

As discussed earlier, a company is liable to pay the higher of the normal tax liability (calculated on the total taxable income) and MAT (calculated on book profit). When MAT for a company is greater than its normal tax liability, the difference between the MAT and normal tax liability is called MAT Credit.

For example :

Tax liability of a company for FY 2019-20 under normal provisions of the Income Tax Act is Rs. 8 lakh while the liability as per the provisions of MAT is Rs. 8.4 lakh. In this case, MAT is higher than the normal tax liability hence the company is eligible for MAT Credit as per Section 115JAA.

Amount of MAT credit = MAT – Normal Tax Liability

= Rs. 8.4 lakh – Rs. 8 lakh

= Rs. 40,000

Carry Forward Mechanism for MAT Credit

A carry forward mechanism for minimum alternate tax credit is currently in effect as per current income tax rules. Currently credit of MAT can be claimed in the assessment year in which the normal tax liability is greater than the MAT liability. Note that the maximum amount of MAT credit that you can claim cannot exceed the difference between the normal tax liability and the MAT liability of the year for which MAT credit is being availed.

For example:

Suppose a company has MAT credit of Rs. 2 lakh. Additional also suppose that tax liability of the company for FY 2019-20 under normal provisions of Income Tax Act is Rs. 10.5 lakh and the liability as per the provisions of MAT is Rs. 10 lakh. Since the normal tax liability is more than the MAT liability, MAT credit can be claimed in this situation.

Additionally, the maximum MAT credit that can be claimed in this case is Rs. 50,000 (difference between the normal tax liability and MAT). Hence, in this case, out of the total MAT credit of Rs. 2 lakh, the company can claim only Rs. 50,000 for FY 2019-20, and the balance credit of Rs. 1.5 lakh will be carried forward to subsequent year(s).

Carry Forward Period for MAT Credit

MAT credit that is equivalent to the tax paid in excess of MAT over normal tax liability can be carried forward up to a period of 15 assessment years from the year MAT credit was generated.

NOTE: No interest is paid to a taxpayer on such MAT Credit.