MAT-Minimum Alternate Tax—-purpose, meaning and calculation mechanism

MAT i.e. Minimum Alternate Tax was introduced by Finance Act 1987 and was made applicable from April 1, 1989 onward.

The basic reason behind introduction of MAT was non-payment of tax by lot of big companies by taking the advantage of various tax benefits and exemptions available under the provisions of Income Tax Act, 1961. These companies were generally known as zero tax companies because despite showing big profits in books of account and paying substantial dividend to shareholders they used to pay marginal or nil tax. To avoid this legalized practice of tax avoidance provisions of MAT was introduced by Finance Act 1987 so that zero tax companies also pay taxes (which they used to avoid but were capable of paying).

By introduction of MAT these zero tax companies were made liable to pay tax to government by assuming certain percentage of their book profit as taxable income. Section 115JB of the Income Tax Act, 1961 deals with provisions of MAT and provides that when the income tax payable by any corporate entity in respect of any previous year is less than 18.5% of the BOOK PROFIT of the entity then such book profit shall be deemed to the total income of the entity and tax @ 18.5% (plus surcharge, if applicable+Cess @ 4%) shall be payable by the entity.

So in simple terms the company has to pay higher of normal tax liability (which is 25% of taxable income plus surcharge and cess as applicable) or Tax as per MAT Provisions (Which is 18.5% of Book profits).

Provisions of Section 115JB relating to MAT are applicable to all corporate entities (private as well as public) but clause 2(b) of the said section provides exception to certain companies viz. insurance companies, banking companies, electricity companies and any other company the preparation of financial statements etc. are governed by the provisions of Act governing those companies.

Form 29 B i.e. report by a Chartered Accountant as prescribed u/s 288 is to be filed for computing the book profits under this section.

Calculation of MAT as pointed out above is dependent on BOOK PROFIT so now we will discuss about the meaning and mechanism of calculation of BOOK PROFIT. Section 115JB (2) provides that except the companies mentioned in clause 2(b) outlined above all the other companies are required to prepare there statement of Profit and Loss Account in accordance with the provisions of Schedule III of the Companies Act, 2013 and while preparing these financial statements accounting policies, accounting standards and depreciation rates etc. adopted in the AGM of the companies to be complied with. Explanation 1 of the Section 115JB deals calculation of Book Profit which provides that Following items should be added back to Profit as per Profit and Loss Account prepared as mentioned above: –

1. Income Tax Paid, Payable or Provided for in the Profit and Loss Account (as it is not an expense)
2. Amount provided for any type of reserves in the P & L Account except reserves made as per section 33AC (it is also not part of expenses)
3. Amount provided for any liability other than ascertained liability (non-existent and contingent liabilities also cannot form part of expenses).
4. Provisions of losses of subsidiary companies
5. Dividend Paid or Provided for in the P & L Account (It is appropriation of profit and not an expense)
6. The amount of expenditure relatable to income arising from section 10, 11 and 12 except section 10(38).
7. Any Expenditure relatable to income/share of profit from AOP/BOI on which AOP/BOI has paid maximum marginal rate of tax as per section 86 of the Income Tax Act, 1961.
8. the amount of depreciation charged/provided for
9. Deferred Tax provided for in the P & L Account
10. the amount provided for diminution in the value of assets e.g. provision for bad debts, writing off of some investment viz. goodwill etc.
11. The amount of revaluation reserve of the retired/disposed off assets (which is not credited to the P & L account).

The figure so arrived at will be reduced by the followings: –

1. any amount credited to P & L Account towards withdrawn from Reserves or written back of provisions except
   1. the amount withdrawn from any reserve created before 01.04.1997 and the same was not debited to Statement of P & L Account at the time of creation.
   2. any provision written back to P & L Account which was allowed in computing the book profit in a previous year relevant to AY on or after 01.04.1997.
2. Exempted income falling in section 10,11 and 12 credited to P & L Account except Section 10(38).
3. Depreciation Charged in P & L account except depreciation on revaluation of assets.
4. The amount credited to P & L Account by withdrawing from Revaluation Reserve to the extent it does not exceed the depreciation on account of revaluation of assets.
5. The amount of Income/Share from AOP/BOI on which maximum marginal rate of tax is being paid.
6. The brought forward loss or unabsorbed depreciation whichever is less as per books of account but in case of any company against whom an application for corporate insolvency resolution process has been admitted then aggregate of brought forward loss and unabsorbed depreciation.
7. The amount of Deferred Tax credited to P & L Account.
8. the amount of profits of sick industrial company for the assessment year commencing on and from the assessment year relevant to the previous year in which the said company has become a sick industrial company under sub-section (1) of section 17 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986) and ending with the assessment year during which the entire net worth of such company becomes equal to or exceeds the accumulated losses

The provisions of MAT does not affect the carry forward of unabsorbed depreciation, business loss, speculation business loss, short term/long term capital loss and loss on account of owning and maintaining horse races.

MAT CREDIT: –

Section 115 JAA(2A) allows for the tax credit of excess amount paid as per section 115JB in comparison to the actual tax as per other provisions of the Income Tax Act, 1961. But this credit cannot be allowed to adjust against the tax payable u/s 115JA and 115JB and only be adjusted against tax payable other than section 115JA and 115JB.

Sub-section 3A provides for carry forward of MAT Credit and states that MAT Credit can be carried forward for 15 (10 years till 31.03.2018, increased by Finance Act 2017).

In simple sense it is like advance tax but to adjusted against tax payable, which is in excess of MAT and no interest is being given by the government against MAT Credit.

Video in simple Hinglish will follow soon,