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Pay 10,000/month for 10 years, Get 1,65,805/Year* for next 15 years.
ARN. No. KLI/23-24/E-BB/1201
Features
Ref. No. KLI/22-23/E-BB/999
Minimum Alternative Tax (MAT) ensures companies pay some tax even if they have low profits due to deductions or exemptions.
In an effort to ensure that profitable companies contribute their fair share to the economy, the Indian government introduced the concept of Minimum Alternate Tax (MAT) through the Finance Act of 1987. It is designed to prevent companies from taking undue advantage of various exemptions, deductions, and incentives to pay little or no tax.
Whether you are a business owner, tax professional, or simply interested in corporate taxation, understanding MAT is crucial for ensuring compliance and fair contribution to the nation’s economic framework.
Minimum Alternate Tax (MAT) is a concept that aims to ensure that companies with significant profits and tax benefits still contribute at least a minimum amount of tax to the government. Introduced by the Finance Act of 1987, MAT was established to curb tax avoidance by companies taking advantage of various exemptions, deductions, and incentives available under the Income Tax Act. Essentially, MAT ensures that no company pays zero tax to the government regardless of the tax benefits it enjoys.
In India, only companies (domestic and foreign) are liable to pay Minimum Alternate Tax (MAT). This applies irrespective of whether it’s a public or private company. However, there are certain exceptions to this rule:
All companies must pay MAT if their taxable income is less than 15% (as per the current rate) of their book profit (recorded profit).
The MAT rate has undergone several changes since its inception. As of the latest financial year, the MAT rate is 15% of the book profit. A surcharge and cess are also applicable, which can vary based on the company’s income slab. Here’s a quick breakdown:
For instance, if the book profit is between ₹1 crore and ₹10 crore, a surcharge of 7% is applied, for profits exceeding ₹10 crores, a surcharge of 12% is applied.
Calculating MAT involves several steps. The formula for MAT is:
MAT= Higher of (a) or (b)
To determine which is higher, a company must first calculate its tax liability under the regular provisions of the Income Tax Act. Then, it must compute 15% of its book profit and compare the two amounts. The higher of the two is the MAT payable by the company.
Book profit is a company’s net profit as shown in its profit and loss account for the relevant financial year. However, certain adjustments are made to this net profit to arrive at the book profit for MAT purposes. These adjustments include:
Certain expenses and provisions debited to the profit and loss account but not allowable as deductions under the Income Tax Act are added back. These include requirements for income tax, deferred tax, reserves, and provisions for bad and doubtful debts.
Certain incomes that are credited to the profit and loss account but are exempt from tax are deducted. These include incomes like the share of profit from a partnership firm, income from units of mutual funds, etc.
The calculation of book profit involves the following steps:
The resultant figure is the book profit for MAT purposes.
MAT credit is a provision that allows companies to carry forward and set off the MAT paid against future tax liabilities. If a company pays MAT in a year when its regular tax liability is lower, the excess amount paid as MAT can be carried forward for up to 15 assessment years. This MAT credit can be set off in subsequent years when the company’s tax liability, as per standard provisions, exceeds the MAT liability.
Minimum Alternate Tax (MAT) is designed to make sure that every company is mandatorily contributing to the country’s tax system. While it may seem like an additional burden, MAT promotes fairness and prevents tax avoidance. Understanding the eligibility, rates, MAT calculation methods, and the concept of book profit and MAT credit is crucial for companies to comply with tax regulations effectively.
1
All companies, including foreign companies with a presence in India, are liable to pay MAT if their taxable income under normal provisions is less than 15% of their book profit. However, certain sectors like power generation, life insurance, and shipping are exempt.
2
The current rate of MAT is 15% of book profit, with additional applicable surcharges and a 4% health and education cess.
3
Yes, MAT credit can be carried forward and set off against future tax liabilities for up to 15 assessment years.
4
Companies must disclose the amount of MAT paid, MAT credit available, and the amount of MAT credit utilized in their financial statements, ensuring transparency and compliance with the Income Tax Act.
5
MAT can affect mergers and acquisitions by influencing the valuation of companies, as the acquiring company must consider the target company’s MAT liabilities and available MAT credits in the transaction.
6
Tax treaties generally do not affect MAT applicability as MAT is a domestic tax measure. However, foreign companies should review specific treaty provisions to understand any potential implications.
Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.
Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors
Pay 10,000/month for 10 years, Get 1,65,805/Year* for next 15 years.
ARN. No. KLI/23-24/E-BB/1201
Features
Ref. No. KLI/22-23/E-BB/999
The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The content has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Further customer is the advised to go through the sales brochure before conducting any sale. Above illustrations are only for understanding, it is not directly or indirectly related to the performance of any product or plans of Kotak Life.
