tax planning under mat

MAT stands for Minimum Alternate Tax, and it was launched to reduce (if not to bridge) the gap between tax accountability as per income calculation and book profits. In this article, let us explore how tax planning under MAT works.

MAT – A Brief Introduction

Minimum Alternative Tax is payable under the Income Tax Act. The concept of MAT was introduced to target those companies that make huge profits and pay the dividend to their shareholders but pay no/minimal tax under the normal provisions of the Income Tax Act, by taking advantage of the various deductions, and exemptions allowed under the Act. 

But with the introduction of MAT, the companies have to pay a fixed percentage of their profits as Minimum Alternate Tax. MAT is applicable to all companies, including foreign companies. MAT is calculated under Section 115JB of the Income-tax Act. 

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

1. Tax liability as per the Normal provisions of income tax act (tax rate 30% plus 4% edu. cess plus surcharge (if applicable).

Tax liability for the domestic companies is 25% plus 4% cess and applicable surcharge, as per the normal provisions of the Income Tax Act whose turnover or gross receipts is upto Rs.400 crore.

2. Tax liability as per the MAT provisions are given in Sec 115JB (The tax rate is 15% of Book Profits plus 4% education cess plus a surcharge, if applicable, with effect from AY 2020-21 (FY 2019-20)). 

How to Calculate MAT?

MAT is equal to 15% with effect from AY 2020-21 (MAT was 18.5% prior to AY 2020-21) of Book profits (Plus surcharge and cess, as applicable). 
Book profit means the net profit as shown in the profit & loss account for the year as increased and decreased by the following items:

Additions to the Net Profit (If debited to the Profit and Loss Account)

1. Income Tax paid or payable if any calculated as per normal provisions of income tax act.
2. Transfer made to any reserve
3. Dividend proposed or paid
4. Provision for loss of subsidiary companies
5. Depreciation including depreciation on account of revaluation of assets
6. Amount/provision of deferred tax
7. Provision for unascertained liabilities e.g. provision for bad debts
8. Amount of expense relating to exempt income under sections 10,11,12 (except sec 10AA and 10(38). This means income under section 10AA & long term capital gain exempt under section 10(38) are subject to MAT provision made for diminution in the value of any asset.

Deletions to the Net Profit (If credited to the Profit and Loss Account)

1. Amount withdrawn from any reserves or provisions
2. The amount of income to which any of the provisions of section 10, 11 & 12 except 10AA & 10(38) applies.
3. Amount withdrawn from revaluation reserve and credited to profit & loss account to the extent of depreciation on account of revaluation of asset.
4. Amount of loss brought forward or unabsorbed depreciation, whichever is less as per the books of account. However, the loss shall not include the depreciation. (if loss brought forward or unabsorbed depreciation is nil then nothing shall be deducted).
5. Amount of Deferred Tax, is any such amount is credited in the profit & loss account
6. Amount of depreciation debited to the Profit and Loss Account (excluding the depreciation on revaluation of Assets)

What is MAT Credit?

When any amount of tax is paid as MAT by the company, then it can claim the credit of such tax paid in accordance with the provision of section 115JAA.

Allowable Tax Credit: Tax paid as per MAT calculation — Income tax payable under normal provision of Income-tax Act, 1961. 

Note: No interest shall be paid on this Tax credit by the Department.

Illustration

ABC Ltd has the taxable income as per normal provisions of the Income Tax Act Rs.40 lakhs and Book profits of Rs.75 lakhs for the FY 2023-24. 
Tax payable will be higher of the following two:

• Tax payable as per normal provisions of the Income Tax Act
  • Rs.30,00,000 @ 30 % plus 4% = 9,36,000
• Tax liability as per MAT provisions
  • Rs.75,00,000 @ 15% plus 4% = Rs.11,70,000

Hence Tax payable by the company will be Rs.11,70,000
Entitlement of MAT Credit: Rs.11,70,000 – Rs.9,36,000 = Rs.2,34,000
Such tax credit shall be carried forward for 15 Assessment Years immediately succeeding the assessment year in which such credit has become allowable. 

This is with effect from AY 2018-19. Prior to which MAT could be carried forward only for a period of 10 AYs. 

For instance, if the excess tax is paid in FY 2023-24, then the credit of such tax can be carried forward from FY 2024-25. MAT credit shall be allowed to be set off in a year when the tax becomes payable on the total income in accordance with the normal provisions of the Act. 

Set off shall be allowed to the extent of difference between the tax on the total income under normal provision and tax which would have been payable as per MAT under section 115JB. MAT credit can be better explained with the help of an illustration. 

So let’s try to understand it with the help of an example:

• Actual tax payable: Higher of Tax Payable under MAT or Tax Payable as per normal provisions.
• MAT credit set off is allowed only if tax payable as per normal provisions is greater than tax payable as per MAT and also to the extent of the difference between the two.
• MAT Credit Available under section 115JAA: Tax Payable under MAT – Tax Payable as per normal provisions