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The goal of MAT, or Minimum Alternate Tax, is to make it easier to tax “zero tax firms” by requiring them to pay at least tax based on actual book profit. This tax applies to all businesses, including foreign businesses that have established a presence in India. MAT is a levy imposed by the Income Tax of 1961, Section 115JB. The Finance Act of 1987 was the first to establish it, and it went into force in the fiscal year 1988-89. It was then repealed by the Finance Bill act of 1990 but was reinstated on April 1, 1997.
According to the MAT principle, a company’s tax burden will be the greater of the two following regulations:
Tax liability calculated according to the Income Tax Law’s standard requirements (30 percent tax rate individual’s knowledge cess plus surcharge, if applicable) or
On book profit, tax is calculated using the MAT provision (15 percent tax rate + surcharges and educational cess, when applicable).
Some corporations have used various aspects of something like the Income Tax Act, including exemption, depreciation, discounts, and so on, to avoid paying some taxes. MAT is a mechanism to ensure that this will not occur and that businesses pay the least tax possible.
What is the formula for calculating MAT?
So when taxable income determined under the I-T Regulation act is less than 15.5 percent (plus surcharge and cess where applicable) of the net profits, so, under the Companies Act, 2013, MAT is applied.
A corporation with a book profit of Rs 100 crore, for example, must make a minimum tax worth Rs 15 crore (15 percentage MAT rate). If its regular tax burden after reductions is Rs 10 crore (below than MAT), it must pay the remaining Rs 5 crore as MAT and apply MAT credit equal to Rs 5 crore to future tax payments.
The government lowered the MAT rate of tax from 18.5 percent to 15 percent in September 2019 while simultaneously lowering the company tax rate from 30 percent to 22 percent. Unlike conventional corporate tax imposed on taxable earnings, MAT is charged on book profit. In addition, no MAT would be charged to domestic manufacturing companies (created on or after October 1, 2019).
What is MAT credit, and how does it work?
The differential between the tax paid through MAT and the standard tax is known as the MAT credit. It can be carried forward into a maximum of 15 financial years. A MAT is a tax that is paid in advance. In 2005, the notion of MAT credits was reintroduced with a five-year carry-forward method. This was later expanded to ten years and fifteen years in 2018.
According to the Central Board of Direct Taxes, companies opting for the reduced corporate tax regime are unable to offset their collected credits on minimum alternative tax (MAT) towards their tax liabilities.
The purpose of levying MAT is to achieve the following
It is possible that a taxpayer, such as a corporation, generated revenue during the year but was able to decrease its tax due or avoid paying any tax at all by utilising various provisions of the Income-tax Law (such as exemptions, deductions, depreciation, and so on). The Finance Act of 1987, having effect from the assessment year 1988-89, established MAT in response to a spike in the amount of zero-tax-paying businesses. It was afterward repealed by either the Finance Act of 1990 and then reinstated by the Finance (Number. 2) Act of 1996, wef1-4-1997.
The goal of MAT would be to bring “zero tax corporations” into the tax net, which, despite earning considerable book profits and paying huge sums, do not pay any income tax because of several tax discounts and incentives offered by the Income-tax Law. Since its inception, various amendments have been made to the provisions of MAT, and it is now imposed on businesses under the terms of section 115JB.
CONCLUSION
Companies and Limited Liability Partnerships are subject to the Minimum Alternate Tax (MAT), which requires the company or LLP to pay a minimum tax based on its book earnings. Without the notion of MAT, a considerable number of corporations and limited liability partnerships (LLPs) had booked profit in their profits and losses or were not paying income tax since their earnings estimated under the Income-tax Acts have either been nil, negative, or negligible. As a result, the notion of MAT was created in India to help regularise such taxpayers. The Government of India conceived the idea of MAT in 1988 to promote accountability and ensure that neither company avoided paying taxes. MAT permits the taxing of zero-tax companies. MAT was established by the Finance Act of 1987 and went into force in 1988-89. According to MAT, such businesses must pay the government by classifying a portion of their book profit as tax liability.
