Minimum Alternate Tax (MAT)

The Minimum Alternate Tax (MAT) is a provision under the Income-tax Act, 1961, introduced to ensure that companies which report substantial profits and pay high dividends do not escape taxation through various exemptions, deductions, and incentives available under the law. It serves as a “minimum floor” tax that ensures all profitable companies contribute a fair share of tax to the government, even if their taxable income under normal provisions is negligible or nil.
The concept of MAT thus upholds the principle of equity in taxation, promoting fiscal responsibility and preventing tax avoidance through excessive use of incentives or loopholes.

Background and Evolution

Prior to the introduction of MAT, several highly profitable companies managed to avoid paying income tax by exploiting deductions, exemptions, and incentives provided under various sections of the Income-tax Act (for example, Sections 10A, 10B, 80HHC, etc.). Such companies were often referred to as “zero-tax companies”, as they declared large book profits to shareholders but reported little or no taxable income to the government.
To address this inequity, the concept of Minimum Alternate Tax was first introduced by the Finance Act of 1987, under Section 115J of the Income-tax Act. The system has since evolved through successive amendments:

1. 1987 – Section 115J: Introduced MAT for companies based on 30% of book profits.
2. 1997 – Section 115JA: Reintroduced with modifications, after temporary withdrawal.
3. 2000 – Section 115JB: Current operative section defining MAT, effective from Assessment Year 2001–02 onwards.

Section 115JB provides that every company shall pay a minimum amount of tax on its book profits if the tax liability computed under the normal provisions of the Income-tax Act is less than the prescribed MAT rate.

Objective of MAT

The main objectives of introducing MAT are:

• To ensure that profit-making companies do not avoid tax liability through exemptions or deductions.
• To create a level playing field among corporate taxpayers.
• To broaden the effective tax base and reduce revenue leakage.
• To maintain fiscal equity and transparency in corporate taxation.

Applicability

MAT applies to:

• All companies, whether domestic or foreign, registered under the Companies Act and liable to pay income tax in India.
• Companies that have book profits under the Companies Act but pay less than the prescribed percentage of tax under normal provisions.

However, certain entities and sectors (such as units operating in International Financial Services Centres – IFSC) enjoy exemptions or concessional rates under specific conditions.

Legal Provision under Section 115JB

As per Section 115JB of the Income-tax Act, 1961, if the income tax payable by a company on its total income computed under normal provisions is less than 15% of its book profit (plus applicable surcharge and cess), then the book profit shall be deemed to be the total income, and the company shall pay MAT at 15% of such book profit.
Formula:

MAT Payable = 15% of Book Profit (plus Surcharge and Health & Education Cess)

(Note: The MAT rate has varied over time—18.5% before being reduced to 15% by the Finance (No. 2) Act, 2019.)

Meaning of “Book Profit”

The term book profit refers to the net profit as shown in the statement of profit and loss account prepared in accordance with the provisions of the Companies Act, 2013, subject to specific adjustments (additions or deductions) prescribed under Section 115JB.
Book Profit = Net Profit as per P&L Account ± Adjustments under Section 115JB
Adjustments include:
(A) Additions:

• Income-tax paid or payable, and provision for it.
• Amounts carried to reserves.
• Provisions for unascertained liabilities.
• Depreciation (as per books) if revaluation of assets has been done.
• Deferred tax or provisions thereof.

(B) Deductions:

• Amounts withdrawn from reserves or provisions, if credited to P&L account.
• Income exempt under Section 10 (such as SEZ income).
• Depreciation (excluding revaluation).
• Profits of eligible units under Sections 80HHC, 80-IA, etc. (in certain cases).

After these adjustments, the resulting figure is considered book profit for the purpose of MAT calculation.

Illustration

Suppose a company’s details for a given year are as follows:

• Net profit as per P&L Account: ₹10 crore
• Tax liability under normal provisions: ₹1 crore
• Book profit after adjustments under Section 115JB: ₹9 crore

Then,MAT = 15% of ₹9 crore = ₹1.35 crore
Since ₹1.35 crore (MAT) > ₹1 crore (normal tax), the company must pay ₹1.35 crore as tax for the year.

MAT Credit

To ensure that MAT does not permanently burden taxpayers, the law allows companies to carry forward the excess tax paid under MAT for adjustment in future years when normal tax liability exceeds MAT.

• The difference between MAT paid and normal tax liability is treated as MAT Credit.
• MAT Credit can be carried forward for up to 15 assessment years.
• It can be set off against the normal tax liability in subsequent years (to the extent of the difference).

Example:If a company pays ₹1.35 crore under MAT and its normal tax liability in the next year is ₹2 crore, it can claim MAT credit of ₹0.35 crore.

Exemptions and Concessions

Certain categories of income or companies are exempt or subject to concessional MAT rates:

• Units located in an International Financial Services Centre (IFSC): MAT rate is 9% (instead of 15%), provided income is earned in convertible foreign exchange.
• Companies opting for special concessional tax regimes:
  • Domestic companies under Section 115BAA (22% rate) or 115BAB (15% rate) are exempt from MAT.
• Foreign companies: MAT applies only if they have a permanent establishment (PE) or if they claim deductions or exemptions under Indian tax laws.

Impact of MAT

Positive Impacts:

• Ensures that all profit-making companies pay at least a minimum level of tax.
• Prevents misuse of exemptions and deductions.
• Contributes to government revenue and fiscal stability.
• Enhances transparency and equity in the tax system.

Negative Impacts:

• Increases the effective tax burden for companies with genuine exemptions (e.g., SEZ units, infrastructure firms).
• Complicates tax compliance and computation due to adjustments.
• Creates cash flow challenges, as companies must pay MAT even when eligible for long-term tax incentives.
• May discourage investment in sectors relying on tax holidays or accelerated depreciation benefits.

Difference between MAT and AMT

The concept of Alternate Minimum Tax (AMT) was introduced in 2011 to extend a similar minimum tax provision to non-corporate taxpayers, such as LLPs and partnerships.

Recent Developments

• Finance Act, 2019: Reduced MAT rate from 18.5% to 15% to boost corporate profitability and align with global tax competitiveness.
• Withdrawal of MAT on Certain Income: The government clarified that MAT would not apply to income of foreign companies from capital gains, interest, royalties, or fees for technical services, provided tax is paid under normal provisions.
• Rationalisation: Gradual reduction in MAT rates and simplification of adjustments have been undertaken to make India’s corporate tax regime more competitive.