MAT Phenomenon

The full form of MAT is Minimum Alternate Tax. Before implementing MAT rules, several corporations took advantage of different tax exemptions, deductions, depreciation, and so on to decrease or avoid tax payments while having profits. The Finance Act of 1987 established MAT to ensure that all businesses pay at least a minimum amount of income tax. Let’s see in detail about MAT, its examples, and the difference between MAT and AMT. 

Difference Between MAT And AMT 

Minimum Alternate Tax (MAT) and Alternate Minimum Tax (AMT) are measures implemented in income tax law to guarantee that taxpayers who take advantage of different deductions and exemptions are not exempt from paying at least a minimum amount of income tax. Let us understand the difference between MAT and AMT concerning other things. 

Difference Between MAT And AMT As Per Applicability 

As per Section 115JB of the Income Tax Act, MAT must be submitted by a firm if the tax on the whole income, computed as indicated in the income tax rules in any year, is less than 18.50% of its book-profit+surcharge (SC)+health and education cess. MAT may be used in both the business and public sectors. However, MAT is not applicable in the following situations:

• MAT does not apply to revenue earned by life insurance enterprises, according to Section 115JB (5A).
• According to Section 115 V-O, MAT does not apply to shipping revenue subject to tonnage taxes.
• MAT is not applicable to a foreign assessee who falls into one of the following categories: if the assessee is a resident of a country or territory with which India has an agreement or if the central government has adopted an agreement under Section 90A (1), and if the assessee does not have a permanent establishment in India following the provisions of the agreement.
• If the assessee is a resident of a country with which India does not have an agreement, as defined in subsection I, and if the assessee is not required to register under any legislation.
• Foreign corporations whose total revenue includes earnings from enterprises listed in Sections 44AB, 44BB, 44BBA, or 44BBB.

The following taxpayers are subject to AMT provisions:

• All non-corporate taxpayers; and taxpayers who have claimed a deduction under Chapter VI-A under the heading “C. — Deductions in respect of certain incomes” (provided under Sections 80H to 80RRB) in respect of profits and gains from specific industries, such as hotel business, small scale industrial undertaking, housing projects, export business, infrastructure development, and so on. 

• Deduction under Section 35AD – While capital expenditure in assets typically qualifies for depreciation year on year, under this section, a 100% deduction is allowed on capital expenditure incurred for specified business purposes, such as cold chain facility operation, fertiliser production, and so on.

• Profit linked deduction under Section 10AA – Profit deduction ranging from 100% to 50% is available to units in Special Economic Zones (SEZs).

Difference Between MAT And AMT As Per Provisions

According to MAT regulations, a company’s minimum tax obligation will be higher of the following:

• The typical tax obligation of a corporation is computed following the standard rules of income tax legislation, the taxable amount being the tax rate applicable to the firm.
• Tax on book profit is computed at 18.5%, including surcharge and cess. The amount of taxes calculated by this computation is the MAT.

The AMT provisions apply to any taxpayer who has claimed any of the following:

• Deduction from Section 80H to Section 80RRB.
• Deduction according to Section 10AA and Section 35AD.
• The AMT regulations do not apply to non-corporate entities that have not claimed the deductions mentioned above.
• When an individual, Hindu undivided family, association of persons or body of individuals, or artificial juridical person’s adjusted total income exceeds Rs. 20,00,000, the AMT requirements apply.
• Other persons are subject to the AMT rules without regard to their income.

Explaining Minimum Alternate Tax With An Example 

In the scenario of a firm that is a unit of an international financial services centre and derives its revenue primarily in convertible foreign currencies, MAT is collected at 9% (plus surcharge and cess if applicable).

Let us understand how it is levied by explaining Minimum Alternate Tax with an example: 

The taxable income of ABC Pvt. Ltd. is computed as per the provisions of the Income Tax Act as Rs. 9,30,000. The book profit of the company computed as per the provisions of section 115JB is Rs. 19,30,000. What will be ABC Pvt. Ltd.’s tax liability? (ignore cess and surcharge).

The tax liability of a company will be higher: 

     (i) Normal tax liability, or 

     (ii) MAT. 

The normal tax rate for an Indian firm is 30%* (plus cess and surcharge as applicable). Tax @ 30% on Rs. 9,30,000 will amount to Rs. 2,79,000 (plus cess). The book profit of the company is Rs. 19,30,000. MAT liability (excluding cess and surcharge) @15% on Rs.19,30,000 will come to Rs. 2,89,500. Thus, the tax liability of ABC Pvt. Ltd. will be Rs. 2,89,500 (plus cess as applicable), which is higher than the normal tax liability. 

Please Note: If a domestic company’s turnover or gross receipt does not exceed Rs. 400 crores in the preceding fiscal year 2019-20, subject to a 25% tax rate, it is projected that its revenue would reach Rs. 400 crores in 2019-20.

Conclusion

The Income Tax Act of 1961 not only assesses a tax on earned income, but it also enables different deductions and exclusions from earned income before taxation. Some businesses began to take advantage of these deductions and exclusions, resulting in either decreased or no tax payment. As a consequence, the number of corporations that pay no taxes has climbed. This resulted in the implementation of MAT, which attempted to bring all zero-tax corporations into the tax net, notwithstanding their large earnings and high dividends. 

Later on, AMT was introduced. AMT is a tax assessed on ‘adjusted total income’ in a fiscal year where the tax on regular income is less than the AMT on adjusted total income. As a result, taxpayers who are subject to AMT must pay AMT in addition to their regular tax.