Minimum Alternate Tax (MAT) for Companies & LLPs

Minimum Alternate Tax refers to the least amount of income tax which a

company which is earning profits should pay. The Government of India (GoI) introduced the concept of Minimum Alternate Tax (MAT) to charge income tax on zero tax companies. Zero Tax Companies are companies reporting profits in the books of account and also paying out dividends. A company or LLP falls under the coverage of MAT exclusively if the specified condition is satisfied. The specified condition is that the income tax payable, as computed using the regular provisions of the Act, should be less than 18.5% of book profit (till FY 18-19), or 15% of book profit (with effect from FY 19-20). Nevertheless, such companies are not paying income tax or paying a low amount of income tax on account of availing various incentives and schemes. To prevent such companies from not paying income tax while earning profits, the Government introduced the concept of Minimum Alternate Tax through the Finance Act, 2000. It may be noted that MAT applies only to companies and LLPs. MAT is applicable to foreign companies also.  The Act introduced the levy of a minimum tax on book profits at 18.5%. MAT is applicable for all companies except for companies involved in the life insurance business. MAT is considered payable only if tax applicable as per normal provisions of the Act is lesser than 18.5% of book profits. The applicability of MAT extends to all types of companies, including a private company, one-person company, public limited company and Nidhi company. In the present article, we provide an overview of the MAT provisions of the Income Tax Act. MAT is calculated as a percentage of book profit. The book profit of a company is the accounting profit arrived at after making the specified additions and deductions. The provisions relating to computation of book profit are available in Section 115JB of the Act. The section provides in detail the method to calculate book profit. Income Tax shall be levied on the basis that the book profit as per this section is the Total Income of the company.

MAT Credit

Tax paid as Minimum Alternate Tax is eligible for MAT credit. MAT credit can be carried forward for a period of ten years succeeding the year in which MAT credit becomes allowable. The year when tax becomes payable under the normal provisions of Act shall be considered as the year of allowability of MAT credit. The MAT credit allowable for a certain year is calculated as the difference between tax computed as per normal provisions of Act and Minimum Alternate Tax (MAT) that is payable with reference to book profits of that particular financial year. Hence, balance MAT credit allowable shall be carried forward to the subsequent or next financial year. The interest under section 234A / 234B is charged after MAT credit allowable is set off against tax payable. Consequently, MAT credit provisions guarantee that the company will pay a minimum amount of tax.

Form 29B 

Companies availing MAT provisions are required to furnish a report from Chartered Accountant in Form 29B to confirm book profits are computed according to Sec.115JB. Though most companies obtain the report in the normal course of filing of income tax return, filing of Form 29B is highly recommended while availing MAT provisions or MAT credit.

Tax Rates

• The rate of tax will be 18.5% (till FY 18-19).
• Tax rate will be 15% (with effect from FY 19-20).
• In case of a unit located in an International Financial Services Centre and derives its income solely in convertible foreign exchange, the tax rate will be 9%.

Conditions

The assessee who is covered by MAT provisions should follow the specified conditions. The specified conditions are mentioned below:

• The assessee should prepare Financial Statements according to Schedule III of Companies Act, 2013 (except in case of banking, insurance and electricity companies).
• Banking, Insurance and Electricity companies have an option to follow Schedule III or their own unique format according to the relevant legislation.
• The accounting policies and standards adopted for preparing accounts (including a statement of profit and loss), and method and rates adopted for ascertaining depreciation should be in compliance with Section 129 of the Companies Act, 2013.

Additions to Book Profit

To calculate the book profit, the assessee should add the following items to the figure of profit or loss as per the accounting records:

•        Amount of income-tax paid or payable
•        Provision for Income-tax
•        Amount transferred to reserves (However, in the case of reserves mentioned under Sec. 33AC, the addition need not be made.)
•        Provisions made for meeting liabilities (However, in the case of ascertained liabilities, the addition need not be made.)
•        Provision made for losses of subsidiary companies
•        Dividend paid during the period
•        Proposed dividend
•        Expenditures pertaining to income which is treated as exempted income as per the relevant provisions of the Act
•        Expenditures pertaining to tax-free income which can be regarded as a share in the income of an Association of Persons [AOP] or Body of individuals [BOI]
•        In case of foreign companies, expenditures pertaining to income which can be regarded as capital gains arising from a transaction in securities (The addition should be made in case the income tax payable on such income is less than 15% or 18.5%.)
•        In case of foreign companies, expenditures pertaining to income which can be regarded as interest, royalty or fees for technical services taxable at the rates specified in Chapter XII (The addition should be made in case the income tax payable on such income is less than 15% or 18.5%.)
•        Notional loss on the transfer of a capital asset, which is a share of any special purpose vehicle, to a business trust, in exchange for units allotted by the trust
•        Notional loss resulting from a modification in the carrying amount of such units, or the amount of actual loss arising from the transfer of such units
•        Depreciation
•        Deferred tax
•        Provision for deferred tax
•        Provision for a reduction in the value of an asset
•        The amount standing in the revaluation reserve for a revalued asset, on the retirement or disposal of the asset
•        In case during the year there is any transfer of a capital asset, which is a share of an SPV, to a business-trust, in return for units furnished by that trust to the transferor, then the assessee can include the gain on the transfer.

Deductions from Book Profit

To calculate the book profit, the assessee should deduct the following items from the figure of profit or loss as per the accounting records:

•        Amount excluded from any reserve or provision, in case any such amount is credited to the statement of profit and loss
•        Any income covered by section 10 [excluding 10(38)] or section 11 or section 12, in case it has been credited to the statement of profit and loss
•       Depreciation appearing to the debit of the statement of profit and loss (apart from the depreciation attributable to the revaluation of assets)
•        The amount which is withdrawn from revaluation reserve and credited to the statement of profit and loss, to the extent it does not exceed the amount of depreciation on account of a revaluation
•        Income which is of the nature of share in the income of an AOP or BOI, to the extent no Income-tax is payable on the income as per Section 86 (The deduction should be made the income has been credited to the statement of profit and loss.)
•        In case of foreign companies, income which can be regarded as interest, royalty or fees for technical services taxable at the rates specified in Chapter XII, in case Income-tax payable on such income is less than 15% or 18.5%
•        Notional gain on transfer of any capital asset which is a share of an SPV, to a business trust, in exchange for units allotted by that trust
•        Notional gain arising consequent to any change in carrying amount of the units mentioned above, in case the amount of gain has been credited to the statement of profit and loss
•        Any realised gain on transfer of such units, in case the gain has been credited to the statement of profit and loss
•       Income by way of royalty derived from a patent (to the extent the income is taxable under Section 115BBF)
•       The amount of deferred tax, in case any such amount has been credited to the statement of profit and loss