This article talks about Minimum Alternative Tax. It gives a gist of the applicability and calculation of Minimum Alternative Tax.
Minimum Alternative Tax
Companies find various loop-holes to avoid paying income tax by using several exemptions. Minimum Alternative Tax is a way of making companies pay a minimum amount of tax.
Direct tax in lay terms, a tax on income that you have to pay, it cannot shifted to others. Some of its forms include income tax, wealth tax, etc. Direct taxes are directly levied on individuals, corporations and organisations and collected by way of income tax returns to be filed each 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 include sales tax, service tax, value-added tax, commodity transaction tax and securities transaction tax among others.
One such indirect tax is the minimum alternate tax (MAT). Normally, a company is liable to pay tax on the income computed in accordance with the provisions of the Income-Tax Act, but the profit and loss account of the company is prepared as per provisions of the Companies Act.
In the past, a large number of companies showed book profits on their profit and loss account and at the same time distributed huge dividends. However, these companies didn’t pay any tax to the government as they reported either nil or negative income under provisions of the Income-Tax Act.
These companies were showing book profits and declaring dividends to their shareholders but were not paying any tax. These companies thus popularly known as ‘zero tax’ companies.
Minimum Alternative Tax is a tax payable under Income tax Act. The concept of Minimum Alternative Tax was introduced to target those companies that make huge profits and pay dividend to their shareholders but pay no/minimal tax by taking advantage of the various deductions, and exemptions allowed under income tax act. But with the introduction of Minimum Alternative Tax, the companies have to pay a fixed percentage of their profits as Minimum alternate Tax. MAT is applicable to all the companies including foreign companies.
The Indian Income-Tax Act
The Indian Income-Tax Act allows a large number of exemptions from total income. Besides exemptions, there follows several deductions permitted from the gross total income. Further, depreciation allowable under the Income-Tax Act, is not the same as required under the Companies Act. The latter provides a lower rate viz-a-viz 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 is the emergence of zero tax companies, which in spite of having high book profit are able to reduce their taxable income to nil.
In order to bring such companies under the I-T net, Section 115JA was introduced from assessment year 1997-98. Now, all companies having book profits under the Companies Act shall have to pay a minimum alternate tax at 18.5%.
Minimum Alternative Tax is a way of making companies pay minimum amount of tax. It is applicable to all companies except those engaged in infrastructure and power sectors. Income arising from free trade zones, charitable activities, investments by venture capital companies also excluded from the purview of Minimum Alternative Tax. However, foreign companies with income sources in India are liable under Minimum Alternative Tax.
For example, book profit before depreciation of a company is Rs. 7 lakh. After claiming depreciation and other exemptions, gross taxable income comes to Rs. 4 lakh. The income tax applicable Rs. 1.2 lakh at a rate of 30%. However, MAT would be Rs. 1.29 lakh (Rs. 7 lakh at 18.5%).
The MAT paid can carry forward and set-off (adjustment) against regular tax payable during the subsequent five-year period subject to certain conditions.
Calculation of Minimum Alternative Tax
MAT calculated u/s 115JB of the income tax Act. Every company should pay higher of the tax calculated under the following two provisions:
- Tax liability as per the Normal provisions of income tax act(tax rate 30% plus 3% Edu cess plus surcharge (if applicable)
- Tax liability as per the MAT provisions given in Sec 115JB(18.5 % of Book Profits Plus 3 % edu cess plus surcharge if applicable)
MAT is equal to 18.5% of Book profits(Plus Surcharge and cess as applicable). Book profit means the net profit as shown in the profit & loss account for the year as increased and decreased by following items:
Additions to the Net Profit (If debited to P/l A/c)
- Income Tax paid or payable if any calculated as per normal provisions of income tax act.
- Transfer made to any reserve
- Dividend proposed or paid
- Provision for loss of subsidiary companies
- Depreciation including depreciation on account of revaluation of assets
- Amount/provision of deferred tax
- Provision for unascertained liabilities e.g. provision for bad debts
- Amount of expense relating to exempt income u/s 10,11,12 (except sec 10AA and 10(38) (It means income u/s 10AA & long term capital gain exempt u/s 10(38) are subject to MAT).
Deletions to the Net Profit (If credited to P/L A/c)
- Amount withdrawn from any reserves or provisions
- The amount of income to which any of the provisions of section 10, 11 & 12 except 10AA & 10(38) apply.
- Amount withdrawn from revaluation reserve and credited to profit & loss account to the extent of depreciation on account of revaluation of asset.
- Amount of loss brought forward or unabsorbed depreciation, whichever is less as per the books of account. However loss shall not include the depreciation. (if loss brought forward or unabsorbed depreciation is nil then nothing shall be deducted.)
- Amount of Deferred Tax, is any such amount is credited in the profit & loss account
- Amount of depreciation debited to P/l A/c (excluding the depreciation on revaluation of Assets)
What is MAT CREDIT ?
When any amount of tax thus paid as MAT by the company, then it can claim the credit of such tax paid in accordance with the provision of section 115JAA.
Allowable Tax Credit = Tax paid as per MAT calculation — Income tax payable under normal provision of Income tax Act, 1961.
(However, no interest shall then paid on this Tax credit by the Department.)
Such tax credit shall thus carry forward for 10 assessment year immediately succeeding the assessment year in which such credit has become allowable. For instance If excess tax paid in FY 2016-17, then credit of such tax can carried forward in FY 2017-18 .
Tax credit thus allowed the set off in a year when tax becomes payable on the total income in accordance with the normal provisions of the Act. Set off shall allowed to the extent of difference between tax on the total income under normal provision and tax which would have been payable as pr MAT u/s 115JB.