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The Minimum Alternate Tax (MAT) is a direct tax imposed on the ‘zero tax’ companies at the rate of 18.5 per cent on their book profit. This was first imposed in 1997–98.
Basically, income tax is paid as per the provisions of the Income Tax Act (IT Act), but companies calculate their profit (through profit and loss account) as per the provisions of the Companies Act. The IT Act allows several kinds of exemptions and other incentives from total income together with deductions on the gross income. Again, the rates of ‘depreciation’ under the Companies Act is higher than the IT Act. As a result of these exemptions, deductions and other incentives under IT Act together with higher depreciation under the Companies Act, companies show their taxable income either ‘nil’ or ‘negative’, and this way, the ‘zero tax’ companies emerge.
Practically, ‘zero tax’ companies, might be having high ‘book profit’ and
distributing huge dividends (under the Companies Act) to their shareholders, too, but showing ‘nil’ or ‘negative’ taxable income (under the IT Act) they might not pay any income tax! To bring such companies under the income tax, Section 115JB was introduced in the IT Act in 1997–98 and MAT was imposed accordingly.
MAT is a way of making companies pay minimum amount of tax. It is applicable on all companies except those engaged in infrastructure and power sectors, free trade zones, charitable activities, venture and angel funds. Foreign companies with income sources in India also come under it. The Union Budget 2015–16 has rationalised the MAT provisions for the FIIs (Foreign Financial Institutions)—now they do not need to pay MAT on their profits from capital gains on transactions in securities (which are liable lower tax rate).
We may take an example – suppose a company has ‘book profit’ of Rs. 10 lakh. And, after claiming the deductuions, exemptions and depreciation its ‘gross taxable income’ comes down to Rs. 6 lakh, its taxable income becoming Rs. 4 lakh. In this case, the applicable income tax would be Rs. 1.2 lakh (if rate of income tax is 30 per cent flat). But the comapny will pay a MAT of Rs. 1.85 lakh (at the rate of 18.5 per cent on its ‘book profit’ of Rs. 10 lakh). The concerned comapny needs to pay the tax which is higher— here, the tax to be paid will be Rs. 1.85 lakh.
At present the tax is collected as an advance tax. The tax can be carried forward and set off (adjusted) against regular tax payable during the subsequent 10-year period (known as MAT credit). There has been a strong demand to abolish this tax in the country. Meanwhile, the Union Budget 2017-18 announced to start phasing out the exemptions available to the companies on it from April 2017. So that companies are able to use MAT credit, the carry forward period has been also increased to 15 years.