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October 10, 2020

All you need to know about MAT applicability to Companies

by CA Shivam Jaiswal in Corporate Law, Income Tax

All you need to know about MAT applicability to Companies

Minimum Alternate Tax (MAT) is the means through which the government makes companies that do not pay any tax despite showing hefty book profits and paying handsome dividends to their shareholders pay taxes to the Government. Before the introduction of MAT, companies were getting away with paying almost no tax. This was because income tax law allowed companies to claim certain exemptions, deduct certain expenses and make various provisions to arrive at the taxable income.

As a result of these, the taxable profit would be zero despite a substantial net profit on the books. However, after the introduction of the MAT in 1996, the taxable profit had to be adjusted for these deductions, transfers to reserves, depreciation, deferred tax and so on to arrive at the book profit.

What do you mean by MAT?

As per the concept of MAT, the tax liability of a company will be higher of the following:

  • Tax liability computed as per the normal provisions of the Income Tax Law (basic tax rate plus education cess and surcharge, as applicable) or
  • Tax computed as per the MAT provision on book profit (18.5% tax rate plus surcharge and education cess, as applicable)

To whom are the provisions of MAT applicable?

MAT is only applicable to companies including foreign companies that generate profits through their operations in India and not to individuals, HUFs, partnership firms, etc. MAT is not applicable to any income received by a company from life insurance business and shipping income liable to tonnage taxation covered under Sections 115V to 115VZC of the Income Tax Act, 1961.

As per tax amendments made in the Finance Act 2016 with retrospective effect from 1st April 2001, MAT will not be applicable to a foreign company if:

  • the company (assessee) is from a specific country or territory with which the Indian government has an agreement as per Section 90 (1) or the company does not have a permanent establishment in the country as agreed to the Central Government as per Section 90A(1) and
  • the company (assessee) which does not have the above agreement and is further not required to seek registration under any law for the time being in force relating to companies
  • As per section 115JB(4A), MAT provisions are not applicable to a foreign company whose total income comprises profits and gains arising from businesses referred to in sections 44AB, 44BB, 44BBA or 44BBB

How are book profits computed?

As per Section 115JB, ‘Book profit’ is arrived at after making specified adjustments to the profit as shown in the statement of profit and loss so prepared.

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

  • Amount carried to any reserves by whatever name called (other than reserves relating to shipping business created under Section 33AC)
  • Amount of expenditure in relation to incomes covered by section 10 [except section 10(38)]
  • Amounts of dividends paid or proposed to be paid
  • Amount of depreciation as per tax provisions
  • Balance in revaluation reserve relating to revalued asset on the retirement or disposal of such asset
  • Amount of deferred tax or provisions thereof;
  • Amount of Income tax paid, payable or provision thereof
  • Provisions for loss of subsidiaries
  • The amount or amounts of expenditure relatable to, income, being share of the taxpayer in the income of an association of persons or body of individuals, on which no income-tax is payable in accordance with the provisions of section 86.
  • The amount or amounts of expenditure relatable to income accruing or arising to a taxpayer being a foreign company, from:
    • the capital gains arising on transactions in securities; or
    • the interest, royalty or fees for technical services chargeable to tax at the rate or rates specified in Chapter XII if the income-tax payable on above income is less than the rate of MAT
  • The amount representing notional loss on transfer of a capital asset, being share or a special purpose vehicle to a business trust in exchange of units allotted by that trust referred to in section 47(xvii) or the amount representing notional loss resulting from any change in carrying amount of said units or the amount of loss on transfer of units referred to in section 47(xvii)

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  • Expenditure relatable to income by way of royalty in respect of patent chargeable to tax under section 115BBF
  • Amounts set aside as provision for diminution in the value of assets; Example: Provision for bad debts to be added
  • Amounts set aside to provisions made for meeting unascertained liabilities, However, provisions made on scientific basis are not to added back
  • The amount standing in revaluation reserve relating to revalued asset on the retirement or disposal of such an asset if not credited to statement of profit and loss
  • The amount of gain on transfer of units referred to in section 47(xvii) computed by taking into account the cost of the shares exchanged with units referred to in the said clause or the carrying amount of the shares at the time of exchange where such shares are carried at a value other than the cost through statement of profit and loss as the case may be

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

  • Amount withdrawn from any reserve or provision
  • Amount of income covered by section 10 [except section 10(38)], section 11 or section 12
  • The amount of loss brought forward or unabsorbed depreciation whichever is less as per books of account. Loss and unabsorbed depreciation to be considered in the books as at the commencement of the year
  • Depreciation excluding depreciation on account of revaluation of assets.
  • Any amount withdrawn from the revaluation reserve and credited to P&L A/c, to the extent it does not exceed the amount of depreciation on account of revaluation of assets
  • Amount of deferred tax, if any
  • Profits of a sick industrial company subject to certain conditions
  • The amount of income, being the share of the taxpayer in the income of an association of persons or body of individuals, on which no income-tax is payable in accordance with the provisions of section 86, if any such amount is credited to the statement of profit and loss
  • The amount of income accruing or arising to a taxpayer being a foreign company, from:
    • the capital gains arising on transactions in securities; or
    • the interest, royalty or fees for technical services chargeable to tax at the rate or rates specified in Chapter XII if such income is credited to the statement of profit and loss and the income-tax payable on above income is less than the rate of MAT.
  • The amount (if any, credited to the statement of profit and loss) representing
    • notional gain on transfer of a capital asset, being share of a special purpose vehicle to a business trust in exchange of units allotted by that trust referred to in section 47(xvii); or
    • notional gain resulting from any change in carrying amount of said units; or
    • gain on transfer of units referred to in section 47(xvii),
  • The amount representing notional gain on transfer of units referred to in section 47(xvii) computed by taking into account the cost of the shares exchanged with units referred to in the said clause or the carrying amount of the shares at the time of exchange where such shares are carried at a value other than the cost through statement of profit and loss, as the case may be
  • Income by way of royalty in respect of patent chargeable to tax under section 115BBF
  • Aggregate amount of unabsorbed depreciation and loss brought forward in case of:
    • A company and its subsidiary and the subsidiary of such subsidiary, where, the Tribunal, on an application moved by the Central Government under Section 241 of the Companies Act, 2013 has suspended the Board of Directors of such company and has appointed new directors who are nominated by the Central Government under Section 242 of the said Act
    • A company against whom an application for corporate insolvency resolution process has been admitted by the Adjudicating Authority under Section 7 or Section 9 or Section 10 of the Insolvency and Bankruptcy Code, 2016

What do you mean by MAT Credit?

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 instance, Tax liability of a company for FY 2019-20 under normal provisions of the Income Tax Act is Rs. 7 lakh while the liability as per the provisions of MAT is Rs. 7.4 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 7.4 lakhs – Rs 8 lakhs = Rs. 40,000

For how long can MAT credit be carried forward?

MAT credit can be carried forward up to a period of 15 assessment years from the year in which MAT credit was generated.

MAT credit shall be allowed to be set off in a year when the tax becomes payable on the total income in accordance with the normal provisions of the Act. Set off shall be allowed to the extent of difference between the tax on the total income under normal provision and tax which would have been payable as per MAT under section 115JB.

The concept of MAT Credit can be understood better with the help of the table given below:

YearTax payable as per MATTax payable as per Normal ProvisionsActual Tax PayableTax Credit AvailableTax Credit Set off/ adjustedTotal Tax Credit Available
17,00,0004,00,0007,00,0003,00,00003,00,000
28,00,0005,50,0008,00,0002,50,00005,50,000
39,00,0006,00,0009,00,0003,00,00008,50,000
46,00,0009,00,0006,00,00003,00,0005,50,000
55,00,00010,00,0005,00,00004,00,00050,000

Is a CA required to furnish any report as per the MAT Provisions?

Every company to which MAT provisions applies shall furnish a report from a Chartered Accountant in the Form-29B certifying that the book profit has been computed in accordance with the provisions of the section 115JB and such report shall be furnished along with the return of income.

The objective behind MAT or Minimum Alternate Tax is to facilitate taxation of “zero tax companies”, by making such companies liable to pay a minimum tax based on their book profit. The IT department considers MAT to be an important tool with which it can prevent tax avoidance and if the government has enough revenue in its hands, it means it can invest in public utilities and other infrastructure that make life better for the public.

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