Minimum Alternate Tax is part of the indirect tax category. The Indian government launched MAT to limit the desire of businesses to earn profits by avoiding tax liability due to an exclusion. Many kinds of taxes are part of our tax system, which apply to companies and individuals. The Indian government is making its greatest effort to make the tax structure more transparent.
In addition, the government pays close attention to businesses or individuals who do not follow taxation rules to make a profit. Our tax system is classified as indirect and direct taxes, and Minimum Alternative Tax, also known as the MAT, is a type of tax that falls within the indirect tax category. Let's define Minimum Alternative Tax and look at the basics of this tax classification.
Did you know?
Have you wondered whether MAT applies to loss-making companies or not? MAT is just for those companies, but a similar concept applies to various taxpayers in the form of AMT (Alternate Minimum Tax). Previously at 18.5%, MAT was levied on the book profits. However, in 2019, the Finance Act amended it to be charged at 15% on the book profits. The following section discusses the basic aspects to explain the Minimum Alternative Tax.
What is Minimum Alternative Tax?
Minimum Alternate Tax (MAT) is a provision in direct tax laws that limits tax exemptions granted to corporations so that they pay the government at least a minimum amount of corporate tax. The main goal of the MAT is to ensure that all domestic and foreign enterprises in India pay the same amount of tax.
Basic Aspects to Define Minimum Alternative Tax
Following are the basic aspects to define MAT:
Tax Payments in Advance
If the tax obligation for the upcoming fiscal year is ₹10,000 or greater, then every taxpayer must advance tax per the Income Tax Act. In the same way, as per Section 115JB in the Income Tax Act, all companies must pay tax in advance.
MAT Applicability to SEZs (SEZs)
The MAT directives did not apply to earnings generated by companies that operate within SEZs when they were first implemented. The Finance Act, 2011 amended the law, adding a provision applicable to Section 115JB for all businesses. SEZs's operations earn profits.
When a business is required to pay a minimum tax alternative rather than regular taxes under the MAT clause and the tax paid is greater than the tax possessory, the excess amount is given back to the business in the form of the tax credit. The difference between tax computed as per the regular rules in the Income Tax Act and the tax calculated under the MAT provisions of the Act is called the MAT tax credit. In the fundamental laws under the Income Tax Act, an overpayment of tax credits can be carried over. You can also redeem it in the year the company must pay tax. The credit will sustain. It is also possible to set off for ten years of consecutive assessment years following the year when the tax credit was first introduced.
Any companies that have to pay the Alternative Minimum Tax must file a MAT form according to Form 29B.
You have learned about the basic aspects of defining Minimum Alternative Tax.
The Reasons for Levying Minimum Alternative Tax
- Before introducing the MAT provisions, many firms took advantage of deductions, depreciation, tax exemptions and other ways to lower or eliminate taxes even though they were in profit.
- To deal with this issue, in 1987, the Finance Act of 1987 established the MAT, which stands for Minimum Alternative Tax, to make sure that every business pays an income tax.
Basic Prescriptions of the Minimum Alternative Tax
The MAT provisions stipulate the minimum tax liability will be greater than the following:
- The tax obligation of a business is determined based on the customary laws of the Income-tax law. The tax amount taxable will be determined by the tax rate that applies to the company.
- Taxes equal 15% of the book profit, excluding the surcharge and the cess. According to this calculation, the amount of tax determined is referred to as MAT.
Calculating Minimum Alternate Tax
- If the taxable amount calculated according to the Income Tax Act provisions is lower than 15% (+ surcharge and cess if appropriate) in the case of book profits under the Companies Act, 2013, an Alternate Minimum Tax will be applied.
- A company that has an annual book profit of ₹100 crores, for instance, has to pay the minimum tax of ₹15 crores (assuming a 15% MTA rate).
If its tax burden, after deductions, is more than ₹10 crores (less than MAT), the company must pay the rest of the ₹5 crores in MAT and then apply MAT credit equivalent to ₹5 crores in future tax bills.
The Applicability of the Minimum Alternative Tax
According to Section 115JB of the Revenue Tax Act, a company must pay MAT if:
- As computed under the rules of the Income Tax Act for any year, the tax on total income is less than 15% of its book-profit + surcharge plus health and education cess.
- Both the public and business sectors are both able to benefit from MAT.
What is the Best Way to Calculate the Alternative Minimum Tax (AMT)?
Alternate Minimum Tax operates similar to the standard tax system but has a distinct tax rate structure, and it eliminates certain typical tax breaks. This is how the tax calculation takes place:
- Calculate your tax-deductible income with fewer tax exemptions and tax deductions according to AMT guidelines
- After you have your AMT-based version of your tax income, add the amount of AMT exemption.
- Multiply the result by the tax rates. There are two tax rates for the AMT - 26-28%. (Compare them to other tax brackets, including the seven income tax brackets that range between 10% and 37 %.) The tax rate you pay is based on your AMT taxable income.
- Subtract the foreign tax credit for AMT if you're eligible for it. The remainder is your income taxes under the AMT rules.
- According to AMT rules, your income tax is greater than the tax you pay under regular rules. You have to pay a larger amount. This determines who needs to pay an Alternative Minimum Tax.
The MAT Credit
MAT is available to collect taxes from tax-exempt companies. Additionally, it had to provide a continuous revenue stream for the state. The tax rate is minimal during an FY when normal tax is less than the MAT.
Taxes paid before MAT are entitled to endure and decrease compared to normal taxation, up to the difference between the tax rate and MAT in the FY. Companies can carry any remaining balance after an offset into future fiscal years. Also, MAT credit is the term used to describe this idea.
However, the MAT credit can only be used for 15 fiscal years after the year that the MAT was paid. If the tax rate for regular income is changed due to an order by the IRS, the MAT credit will be affected as well. Additionally, any FTC over AMT will pass over when the taxpayer has a tax credit from abroad.
Capital-intensive companies such as steel and construction have suffered for years from the repercussions of MAT. They have been lobbying to get rid of it since its existence.
Many are still waiting to be in a situation where they don't have to pay for MAT. Since MAT credits can only be carried forward for ten assessment years, this has caused a capital loss due to the MAT. This is yet another example of naiveté from the government, and many measures impede our competitiveness globally in quick-term revenues collection.
Tax is a kind of fuel that drives a country's growth. However, when the tax regulations become strict, unclear and stringent, companies will suffer over the long term.
The MAT rules aren't a good fit from a corporate perspective. However, the constant attempts to make this happen to suggest that changes could be just near and will improve the flexibility of MAT.
The government may make MAT much more accessible for taxpayers and more flexible.
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