Understanding Minimum Alternative Tax (MAT)

MAT (Minimum Alternative Tax) ensures that high-profit earning companies pay a fair share of tax, regardless of the deductions and exemptions they claim to show a zero tax bill. Every company has to pay MAT if the tax on the total income for the FY is below 15% of the book profit + surcharge + health & education cess. However, the final tax liability of a company is decided based on whichever amount is higher (i.e., either normal tax or MAT).

Moreover, the difference between MAT and regular tax is termed as MAT credit. It can be carried forward and used as a credit in the future to offset regular tax liability. Additionally, NRIs don't need to pay MAT unless they run a business in India through the company structure.

Now, you must be confused about what AMT means, then, and whether MAT and AMT are the same. Keep reading further as we will discuss everything about MAT and also understand the difference between MAT and AMT.

What is MAT?

Minimum Alternative Tax (MAT) is a provision introduced to prevent tax avoidance. It means it ensures that highly profitable companies pay a fair share of tax. Even if the company uses various deductions and exemptions to show a zero tax bill, MAT requires them to pay a minimum amount based on their actual reported profits.

But, the question is, does every company need to pay MAT, if yes then on what basis? Let's see that.

Which Company Must Pay MAT?

According to Section 115JB, every company has to pay MAT. This applies if the tax on the total income for the financial year is below 15% of its book profit + surcharge + health & education cess. Moreover, every company must pay corporate tax at least equal to the higher of the following:

• Normal Obligation: Based on the tax rates applicable to the company, the tax is calculated on the taxable income, which is called normal tax liability.
• Minimum Alternative Tax (MAT): Tax calculated on book profit @15%, plus applicable surcharge and cess, is termed as MAT.

How to Calculate MAT?

With effect from AY 2020-21, MAT is equal to 15% of book profits, plus applicable surcharge and cess. It is computed in alignment with the Section 115JB provisions. However, the final taxable amount will be determined based on whichever amount is higher. It means the company will either have to pay its normal tax liability or MAT.

To understand the calculation better, let's take the help of an example.

What is Book Profit Under MAT?

According to Section 115JB (2), Book profit is the net profit as reflected in the profit and loss statements prepared according to Schedule III of the Companies Act, 2013. However, when calculating the book profit, some costs/income are also considered. Here are the major costs and deductions to book profit:

Moving further, we will learn what MAT credit is.

What is MAT Credit?

The difference between MAT and the regular tax is known as the MAT credit. A company can carry forward the extra tax it pays under MAT in a given financial year. They can use this amount as a credit to offset their regular tax liability in the future. Here is how it is calculated:

• Allowable Tax Credit = Tax paid as per the MAT calculation - Income Tax payable as per the normal provisions of the Income Tax Act.

Keep in mind that the department shall pay no interest on this tax credit. Also, you can carry forward the MAT credit.

Carry Forward of MAT Credit

In the AY in which the regular tax liability is more than the MAT liability, you can choose the carry-forward option. However, your MAT credit claim cannot exceed the difference between the regular tax and MAT. You can pile up unused MAT credit for up to 15 years.

If the company pays regular tax in a financial year, it can use the MAT credit in the future, either partially or fully. Here is an example to understand MAT credit easily:

For FY 2017-18, a company's regular tax liability is ₹8 lakhs while its MAT liability is ₹8.4 lakhs. It means the liability under MAT is higher than the regular tax. Hence, the company can claim the MAT credit in line with the provisions in Section 115JAA. Here is how you can calculate it:

MAT Credit = MAT - Regular Tax

= ₹8,40,000 - ₹800, 000

= ₹40,000

In short, the MAT Credit carry-forward mechanism allows a company to carry forward the excess tax paid due to MAT in a financial year. The company can use this as a credit to offset its regular tax liability in the future. Now, one more question arises whether NRIs need to pay MAT. Let's discuss that.

Are NRIs Liable to Pay MAT?

No, Non-Resident Indians (NRIs) don't need to pay MAT unless they are running a business in India via a company structure. MAT is only applicable to companies, and hence, individuals are not liable to pay MAT. So, income earned by NRIs from various sources is taxed under the normal provisions of the Income Tax Act and not under MAT. It can include rent received from property, capital gains from shares or mutual funds, or interest on NRO or savings account.

However, if an NRI starts a company in India, then they may need to pay MAT on the book profits of that company.

Are MAT and AMT the Same?

People often get confused between these two terms and ask whether AMT and MAT are the same. The answer is no, MAT and AMT are not the same. As discussed, MAT means Minimum Alternative Tax, while AMT means Alternative Minimum Tax.

The motive behind both is the same, which is to collect tax by the taxpayer or a company that earns significant profit but still avoids tax. Previously, the MAT concept was introduced only for companies, but now it applies to all taxpayers through AMT. Here are some points to help you understand the difference between AMT and MAT easily:

• The key difference between MAT and AMT is that MAT is charged on companies. However, AMT is charged on individuals, HUF, BOI, AOP, and artificial juridical persons with adjusted total income over ₹20 lakhs.
• Don't get confused, in simple words, we can say that MAT applies only to corporate taxpayers, while AMT applies to non-corporate taxpayers.
• AMT applies to individuals who claimed deductions from Section 80H to 80RRB, along with Section 35AD and Section 10AA. However, it doesn't include Section 80P.
• Moreover, MAT is computed on the book profit calculated based on Explanation 1 to Section 115JB. Conversely, AMT is calculated on the book profit calculated according to the provisions of Sections 28 to 43D.

The Bottom Line

For businesses operating in India, it's important to understand MAT and its implications under Section 115JB of the Income Tax Act. The concept of MAT ensures that companies making significant profits and have substantial deductions pay a fair share of tax. However, remember that it is not a general rule for all. Its applicability depends on the structure of a company, the presence of a permanent establishment, and the type of income earned.

Moreover, NRIs can set up a profitable business with proper planning and expert support. For such NRIs, Savetaxs works as a reliable partner. Our experts can offer end-to-end assistance with the incorporation, business registration, and launch of a new business entity. We will also help you manage the documents, ensure adherence with the rules, and help with the administrative process. Connect with us right away as our experts are actively working 24/7 across the globe to help you start your business confidently.