Tax Planning Under Minimum Alternate Tax

What Is MAT?

In the past, there have been cases where companies generated income during the financial year but got away with paying minimal tax or no tax at all. In fact, these companies could manage to do this by taking advantage of tax provisions like exemptions, depreciation, and deductions under the Income Tax Act. To address this problem of tax avoidance by companies, the central government introduced the Minimum Alternate Tax (MAT). To increase the government’s tax revenues, MAT income tax was introduced by the Finance Act, 1987 with effect from Assessment Year 1988–89. It was later withdrawn by the Finance Act, 1990 and then reintroduced by the Finance (No. 2) Act, 1996, from 1 April 1997. These provisions only apply to companies incorporated under the Companies Act.

Related: Tips for Start-up Taxation

MAT Calculation

MAT calculation takes into account a company’s book profits. Book profits need to be calculated in a manner prescribed under the rules of the Income Tax Act. After that is done, a certified chartered accountant has to prepare a report in Form 29B. The form has to be submitted prior to the filing of income tax returns.

MAT is levied at 18.5% of book profits. Then cess—and if applicable, surcharge—is added. If this amount is greater than the income tax calculated in the standard accounts, then the higher amount, i.e. the amount calculated under MAT provisions, is the tax payable. If the MAT income tax calculated under MAT provisions is lower, then normal income tax is payable.

The calculation of book profits is prescribed in the Income Tax Act and Rules. The tax computed by applying 18.5% (plus cess at 4% and surcharge, if applicable) is the MAT. This amount is payable if it is more than the tax payable using normal calculation under other sections of the Income Tax Act.

Related: What is Dividend Distribution Tax?

What Is Alternate Minimum Tax?

With the introduction of Alternate Minimum Tax (AMT), taxpayers other than companies came under similar provisions. AMT is applicable to partnerships and individuals as well. When it comes to individuals and Hindu undivided families (HUFs), AMT is not applicable as long as the total income does not exceed Rs 20 lakh. But there are additional requirements—for example, deductions under certain sections have to be adjusted to the income. If no deduction is claimed under these sections, no adjustment is made to the income.

Provisions Under MAT

Under the provisions of MAT, the tax liability of a company will be higher than the tax calculated under other provisions or the tax calculated under MAT.

What Is MAT Credit?

It is important to understand what MAT credit is. A company has to pay the higher of its normal tax liability or its liability according to the MAT provisions. In a year that the company pays its liability as per MAT, it can make a claim of credit of MAT paid over and above its normal tax liability in the immediately following year(s). This tax credit will be up to the difference between the normal tax and the MAT calculated. There is also a provision to give credit for tax paid overseas, i.e. foreign tax credit.

Earlier MAT credit could be carried forward for 10 years, and from 2019, it can be carried forward for another five years. If the MAT credit is not used by the company within the fifteen years, then it will lapse. MAT credit does not earn any interest.

Related: Penalties Under the Income Tax Act

Applicability & Non-applicability Of MAT Tax

All companies, whether Indian or foreign, come under MAT provisions. But it does not apply to income that accrues to a company dealing with life insurance business as mentioned in Section 115B. Besides, as per Section 115V-O, MAT provisions are also not applicable to a shipping income that is subject to tonnage taxation.

However, MAT provisions do not apply to a foreign company which is a tax resident of a country or a specified territory with which India has a Double Taxation Avoidance Agreement (DTAA). Additionally, the company has to have no permanent establishment in India.

MAT also does not apply to a foreign company which is not required to seek registration under any law. This company may be a tax resident of a country with which India does not have DTAA.

Related: Form 67 – Claim of Foreign Tax Credit

Planning Under MAT

Companies offering financial services and having all earnings in foreign currencies have to pay only 9% MAT on their book profits. But this is possible only if they operate from an International Finance Service Centre (IFSC). Also, companies should check their transactions and deductions to ensure that they calculate their tax liabilities properly and pay taxes in full. Companies paying MAT need to check the MAT credit that has been carried forward. They should claim the credit when their tax liability under other provisions is higher than the MAT calculated.

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