Minimum Alternate Tax (MAT)

Minimum Alternate Tax (MAT) is a tax effectively introduced in India by the Finance Act of 1987, vide Section 115J of the Income Tax Act, 1961 (IT Act), to facilitate the taxation of ‘zero tax companies’ i.e., those companies which show zero or negligible income to avoid tax. The Minimum Alternate Tax is a measure to bring all companies under loop of Income Tax Act. It ensures that companies having healthy financials and substantial income pay minimum Income Tax under MAT and don’t avoid Income Tax after calming exemptions.

MAT was subsequently withdrawn in the year 1990 by the Finance Act 1990 and was reintroduced by the Finance Act 1996. Unless specifically exempted from MAT Provisions, every company including foreign company whose tax payable on total income in respect of any assessment year is less than 15% of book profit is liable to pay MAT at the rate of 15% of its book profit.

What is Book Profit for MAT?

As per section 115JB(2) “book profit” means the net profit as shown in the profit and loss statement prepared in accordance with Schedule III to the Companies Act, 2013. Some costs/income is considered along with the profit and loss statement when calculating the book profit.

Some major costs are listed below:

1. Income tax paid/payable and the provision for the same
2. Amounts moved to any reserves except those specified under Section 33AC
3. Provisions for unascertained liabilities
4. Provisions for losses incurred in subsidiary companies
5. Dividends paid/proposed
6. Expenditure related to incomes that are exempt under sections 10 [except section 10(38)], 11 and 12
7. The amount of expenditure related to, income, on which no income tax is payable is in line with provisions of section 86

Major deductions to book profit:

1. Amount withdrawn from reserves or provisions
2. Incomes that are exempt under sections 10, 11 and12 [except those under section10(38)]
3. Depreciation debited to profit and loss statement (excluding the depreciation on revaluation of assets)
4. Amount withdrawn from revaluation reserve such that it does not exceed the depreciation on revaluation of assets

The following companies are exempted from applicability of MAT :

• Foreign company which
• • • (a) is a resident of a country with which India has a DTAA and
    • (b) does not have a permanent establishment in India in accordance with the provision of such DTAA [Clause (i) of Explanation 4 to section 115JB(2)]
  • Foreign company which is
    • (a) resident of a country with which India does not have a DTAA and
    • (b) such foreign company is not required to seek registration under section 380 of the Companies Act, 2013 [Clause (ii) of Explanation 4 to section 115JB(2)]
  • Foreign company whose total income comprises solely of profits and gains from business referred to in section 44B or section 44BB or section 44BBA or section 44BBB and such income has been offered to tax at the rates specified in those sections [Explanation 4A to section 115JB(2)]
  • Life insurance company [Section 115JB(5A)(i)]
  • A company which has exercised the option under section 115BAA [Section 115JB(5A)(ii)]
  • A company which has exercised the option under section 115BAB [Section 115JB(5A)(ii)]
  • A shipping company which has opted for the Tonnage Tax Scheme [Section 115VO]

In terms of sub-section (7) of section 115JB, if the company is a “unit located in an International Financial Services Centre which derives its income solely in convertible foreign exchange”. MAT at the rate of 9% of book profit shall apply to such company for any assessment year in which tax on total income is less than 9% of book profit.

 It not only covers companies registered under the Companies Act but also foreign companies and statutory corporations. The expression “any body corporate incorporated by or under the laws of a country outside India” in Section 2(17)(ii) will also cover Limited Liability Partnerships [LLPs] incorporated abroad. LLP incorporated in India under LLP Act, 2008 is a “firm” as per the definition given in section 2(23) and is not a company.

Hence, LLP incorporated in India will not be liable for MAT. However, foreign LLP is a company within the meaning of section 2(17)(ii) and will be treated as foreign company and will be liable for MAT, unless exempted under Explanation 4 or Explanation 4A in section 115JB(2).

Please Note:

• Where assessee-company incurred loss and paid tax on book profit computed under MAT provision and it was found that after making proposed addition to income, assessee would still be governed by provisions of section115JB and be assessed on same book profit, there would be no excess tax liability under MAT provision, reassessment could not be initiated.
• When taxable income is computed under section 115JB, no penalty can be imposed under section 271(1)(c) for additions made under normal provisions