Companies can reduce their tax liability through various provisions of the Income-Tax Act, such as exemptions, deductions, depreciation, etc. There have been instances of some companies even managing to show nil taxable income despite making substantial profits and paying out dividends, thanks to the various tax concessions and incentives. The tax provision known as Minimum Alternate Tax (MAT) was created to bring these ‘zero-tax paying companies’ within the ambit of income tax and make them pay a minimum amount in tax to the government.
To improve accountability, and to ensure that no company avoided paying taxes, the Government of India in 1988 came up with the concept of MAT, which facilitates the taxation of zero-tax companies. Introduced by the Finance Act, 1987, MAT came into effect from assessment year 1988-89. According to MAT, such companies are liable to pay to the government by deeming a certain percentage of their book profit as taxable income.
How is MAT calculated?
Minimum Alternate Tax is applied when the taxable income calculated according to the I-T Act provisions is found to be less than 15.5 per cent (plus surcharge and cess as applicable) of the book profit under the Companies Act, 2013.
For example, a company with Rs 100 crore book profit is required to pay a minimum tax of Rs 15 crore (assuming 15 per cent MAT rate). If its normal tax liability after claiming deductions is Rs 10 crore (less than MAT), it is required to pay the remainder Rs 5 crore as MAT and use MAT credit equivalent to Rs 5 crore to pay tax in the future.
In September 2019, the government reduced the MAT tax rate from 18.5 per cent to 15 per cent while also slashing the corporation tax rate to 22 per cent from 30 per cent. MAT is levied on book profit, unlike normal corporation tax, which is levied on taxable profit. Also, no MAT would be imposed on new domestic manufacturing company (incorporated on or after October 1, 2019).
What is MAT credit?
MAT credit is the difference between the tax the company pays under MAT and the regular tax. It is allowed to be carried forward for a period of 15 financial years. MAT is similar to an advance tax. The concept of MAT credit was re-introduced in 2005 with a carry-forward mechanism of five years. This was subsequently increased to 10 years, and to 15 years in 2018.
According to the Central Board of Direct Taxes (CBDT), companies opting for the lower corporation tax regime cannot adjust their accumulated credits on minimum alternate tax (MAT) against their tax liabilities.