Everything you ever need to Know about MAT - Minimum Alternate Tax

What is MAT - Minimum Alternate Tax?

MAT or Minimum Alternate Tax is a provision in Direct tax laws to limit tax exemptions availed by companies so that they mandatorily pay a minimum amount of tax to the government. As per Section 115JB, all companies are required to pay corporate tax at least equal to the higher of the following:

• Normal Tax Liability: Calculated as per the normal provisions of the Income Tax Act, i.e. by applying the relevant tax rate to the taxable income of the company. Please note that the Ministry of Finance has revised the corporate tax rates in September 2019.  

• Minimum Alternate Tax (MAT):  For FY 2019-20, tax payable is computed at 15% (previously 18.5%) on book profit plus applicable cess and surcharge. 

NOTE: MAT is levied at the lower rate of 9% (plus surcharge and cess, as applicable) for companies that are a unit of an International Financial Services Centre and derive their income solely in convertible foreign exchange.

Which companies are liable to pay MAT - Minimum Alternate Tax?

>All companies whether private or public irrespective of whether Indian or foreign are liable to pay MAT if the income tax payable  (including cess and surcharge) as per the provisions of the Income Tax Act is less than 15% of the book profit plus cess and surcharge. 

Exceptions:

• MAT is not applicable to any income received by a company from the life insurance business and shipping income is liable to tonnage taxation. The tonnage taxation system in covered under Sections 115V to 115VZC of the Income Tax Act, 1961.

NOTE:  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 of the income tax Act.

How is MAT - Minimum Alternate Taxcalculated?

MAT is calculated as 15% of the book profit of the tax assessed. Under existing rules, book profit is calculated as per  Section 115JB  of the Income Tax Act, 1961.

Minimum Alternate Tax calculation example:

 The taxable income of ABC Company, not availing any tax exemptions/incentives, as per the provisions of the Income Tax Act, 1961 is Rs. 10 lakh. Thus, the normal tax liability of this company at the rate of 22% corporate tax will be Rs. 2.2 lakh plus cess and surcharge. 

On the other hand, the book profit of this company as per Section 115JB is Rs. 20 lakh. Thus, MAT at the rate of 15% of book profit will be Rs. 3 lakh plus cess and surcharge.

Since, MAT is higher than the normal tax liability, the company will be liable to pay Rs. 3 lakh (plus cess and surcharge) as MAT and not Rs. 2.2 lakh (plus cess and surcharge).