Importance of Minimum Alternate Tax in Tackling Tax Avoidance

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Importance of Minimum Alternate Tax in Tackling Tax Avoidance

Minimum Alternate Tax (MAT) was created to decrease the gap between the tax accountability under income calculation and book profits. Further, the objective behind MAT was to bring the ‘zero-tax paying companies’ within the ambit of income tax. It also makes them pay a minimum amount in tax to the government. Minimum Alternative Tax is payable under the Income Tax Act, 1961. In this blog, let us explore the ‘importance of Minimum Alternate Tax in Tackling Tax Avoidance.

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Minimum Alternate Tax (MAT)

The concept of MAT was first introduced in India. It targeted companies that make huge profits and pay dividends to their shareholders. But do not pay any minimal tax as per the normal provisions of the Income Tax Act, by taking advantage of the various deductions, and exemptions allowed in the Act. 

With the introduction of MAT, the companies have to pay a fixed percentage of their profits as Minimum Alternate Tax. It applies to all companies, including foreign companies and calculation is under Section 115JB of the Income-tax Act, 1961. MAT is a tax by a company in advance. The companies must pay tax as per the provisions of the income tax act. The profit and loss account calculation is as per the Companies Act, 2013.

Every company should pay advanced the tax calculated under the following two provisions:

  • Tax liability as per the Normal provisions of the income tax act (tax rate 30% plus 4% Edu. cess plus surcharge (if applicable)
  • Tax liability as per the MAT provisions in Sec 115JB.

Applicability of Minimum Alternate Tax (MAT)

Minimum Alternate Tax (MAT) is only applicable to companies and Limited Liability Partnerships (LLPs). Further, the company or LLP has to pay a minimum tax based on the book profit of the company. However, it does not include individuals, HUFs, partnership firms, etc. Any rules relating to Section 115JA apply to foreign companies that generate profits through their operations in India.

Section 115JB of the Income Tax Act says that every taxpayer being a company is legally responsible to pay MAT.  This will happen when the Income-tax (including surcharge and cess) payable on the total income, calculated under the provisions of the Income-tax Act in respect of any year is less than 18.50% of its book profit including a surcharge (SC) and health & education cess.

What is Book Profit?

According to Explanation, 1 of Section 115JB of the Income Tax Act, 1961, book profit means, the net profit as shown in the statement of profit and loss prepared under Schedule III to the Companies Act, 2013 as increased and decreased by certain items prescribed in this regard.

Book profits refer to the profit by the business entity from its operations and activities and by deducting all the business expenses acquired within a financial year from sale revenue and other income created from the selling of goods & services within that same financial year.

Calculation of Minimum Alternate Tax (MAT)

MAT is practically applicable when the taxable income is as per the I-T Act provisions which is less than 15.5% (plus surcharge and cess as applicable) of the book profit according to the Companies Act, 2013.

Features of the Minimum Alternate Tax (MAT)

Following are some of the common features of MAT:

Advance Payment of Tax

According to, the Income Tax Act, 1961, all the assesses has to pay tax in advance in case the advance tax liability is Rs. 10,000 or more during a financial year (as computed in the provisions of Chapter XVII of the Act). Similarly, all companies have mandatory duty to pay advance tax under Section 115JB of the Income Tax Act.

Applicability of MAT in Special Economic Zones (SEZs)

MAT at first did not apply to income generated by companies via operations in SEZs. However, the amendment took place by the Finance Act, 2011, which made Section 115JB applicable to all companies earning profits from operations in SEZs.

MAT credit

Uncertainty during a year, a company has paid tax liability as per Minimum Alternate Tax, it is allowed to claim credit of excess of MAT paid over the normal tax liability in the following year(s). One can find provisions relating to carrying forward and adjustment of MAT credit in Section 115JAA. If MAT credit is not utilized by the company within 15 years (immediately succeeding the assessment year in which the credit was generated), then it will lapse.

MAT report

All the companies that are liable to pay MAT are compulsory to furnish a MAT report as per in Form 29B (as per rule 40B of the IT Rules).

Minimum Alternate Tax (MAT) for Companies

Launching of MAT was due to an increase in the number of zero-tax companies. Where a company was announcing a book profit and declaring dividends to shareholders, whereas not paying any income tax since the income computer as per the income tax act was negative or negligible. The government introduced MAT in the year 1983 to bring such companies into the income tax net and make them pay income tax.

Alternate Minimum Tax for LLP

Aternate Minimum Tax (is AMT) similar to MAT and is applicable for Limited Liability Partnership (LLP). The provisions of AMT would not be relevant to an individual or; Hindu Undivided Family (HUF) or; a Partnership if the total adjusted income of the person or entity is less than 20 lakh rupees.

Reply to Income Tax NoticesConclusion

Thus, it is clear that section 115JB of the Income-tax Act is important. This section ensures companies pay at least a minimum amount of tax, even foreign companies tracing their income from India. So, withdrawing this provision will lead to tax avoidance.

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CS Urvashi Jain is an associate member of the Institute of Company Secretaries of India. Her expertise, inter-alia, is in regulatory approvals, licenses, registrations for any organization set up in India. She posse’s good exposure to compliance management system, legal due diligence, drafting and vetting of various legal agreements. She has good command in drafting manuals, blogs, guides, interpretations and providing opinions on the different core areas of companies act, intellectual properties and taxation.

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