Minimum Alternative Tax (MAT)

Albert Einstein once said that the “hardest thing in the world to understand is income tax”. The statement rings true as tax laws are quite complicated for most and require time and effort to understand. Most of us manage to get by with a basic understanding of tax matters, but for most, it remains an enigma.

Direct tax, in layman terms, is a tax on income that you must pay, and which cannot be shifted to others. Some of its forms include income tax, wealth tax, etc. Direct taxes are directly levied on individuals, corporations, and organizations and are collected by way of income tax returns, which must be filed each financial year.

An indirect tax is collected by an intermediary (such as a retail store) from the person who bears the ultimate economic burden of the tax (such as the customer). Indirect taxes includes GST (Goods and Services Tax).

Minimum alternate tax (MAT), meanwhile, is like tax paid in advance. Let us understand in detail what MAT is.

Normally, a company is liable to pay tax in accordance with the provisions of the Income Tax Act. However, the profit and loss account of a company is prepared as per the provisions of the Companies Act.

In the past, many companies showed profits on their profit and loss account and, at the same time, distributed huge dividends. However, these companies did not pay any tax to the government as they reported either nil or negative income under the provisions of the Income Tax Act. These companies are popularly known as ‘zero-tax’ companies.

How is this possible? The Income Tax Act allows for many exemptions from an individual’s total income. Besides these exemptions, there are also several permitted deductions. Further, depreciation, allowable under the Income Tax Act, is not the same as under the Companies Act. The latter provides a lower rate compared to the I-T Act, which computes a higher rate of depreciation.

The result of such exemptions, deductions, and other incentives under the Income Tax Act, in the form of liberal rates of depreciation, have led to the emergence of zero-tax companies, which, in spite of high book profit are able to reduce their taxable income to nil.

To bring such companies under the I-T network, Section 115JA was introduced from assessment year 1997-98. Now, all companies that record a book profit shall have to pay a minimum alternate tax @18.5% (plus surcharge and cess as applicable) under the Companies Act.

Thus, MAT is a way of making companies pay a minimum amount of tax. It is applicable to all companies, except those engaged in infrastructure and power. The income arising from free trade zones, charitable activities, and investments by venture capital companies are also excluded from the purview of MAT. However, foreign companies with income sources in India are liable to pay MAT.

For example, the book profit of a company before depreciation is Rs7lakh. After considering depreciation and other exemptions, gross taxable income comes to Rs. 4 lakh. Therefore, applicable income tax is charged @30%, i.e. is Rs1.2lakh. However, MAT would be Rs1.29lakh (@18.5% of Rs7lakh).

Moreover, MAT can be, subject to certain conditions, carried forward or set-off (adjusted) against regular tax payable during the subsequent five-year period.