The minimum alternative tax was presented to the Indian duty regulation in 1987. This was before India’s economic changes in 1991 and the start of foreign portfolio interest in its capital business sectors in 1993. The expense was first intended to extend the duty net to organisations making profits but not paying charges because of different motivating factors. 

Foreign Institutional Investors can incorporate multifaceted investments, insurance agencies, annuity reserves, venture banks and shared reserves. Yet India has limited the number of shares and total resources FIIs can buy, especially in a solitary company. This helps limit the impact of FIIs on individual organisations and the country’s monetary business sectors.

What is MAT?

MAT is the minimum alternative tax. MAT is charged on certain enterprises, income from investments that are not taxed at the normal rates, and on certain types of exempt income such as capital gains arising out of the transfer of assets by a resident or non-resident Indian to non-residents. Minimum alternative tax is a tax on undistributed earnings of certain enterprises. It is computed as the difference between the profits of the year and the income tax payable.

Getting Foreign Institutional Investors (FIIs)

To make India more attractive to foreign investors, the minimum alternative tax was instituted in 1987. MAT is charged on any income from investments that are exempt from income tax or taxed at a concessional rate. It is charged at the rate of 30 per cent on undistributed earnings of companies. The primary objective of MAT is to ensure that the domestic tax rules are not used as a shield for legitimate tax planning purposes.

Minimum Alternative Tax (MAT) in Foreign Portfolio Investment (FPI)

There is a minimum limit of 30% of the profits in foreign portfolio investment. This is levied on the undistributed profits of any non-resident company. 

The benefits conferred under this section are:
(i) Additional tax to be levied at the rate of 30% on the undistributed profits for the financial year.
(ii) No deduction for losses available to Indian resident companies until such deduction would be available to resident companies under corresponding provisions in other provisions of the Income Tax Act, 1961.

Work out TAX

The computation of tax under Section 115JB is as follows:

Net Income (Profit and Loss Account) + Capital Gains – MAT Credit

Thus, if the net income of an enterprise is less than the credit available on minimum alternative tax, then the enterprise becomes liable to mat tax on its entire taxable income in accordance with the provisions of the Act. 

Resident companies are eligible for a deduction from income tax in respect of profits earned from (i) manufacturing and exporting goods; (ii) providing services; (iii) by way of royalty.

Typical Tax Liability

The typical tax liability on the assessee when minimum alternative tax is deducted from the profit of an undistributed income is as follows:

Tax on Profits at the normal tax rate + MAT Credit = Final Tax Payable

Resident companies are eligible for a deduction from income tax in respect of profits earned from (i) manufacturing and exporting goods; (ii) providing services; (iii) by way of royalty. On the other hand, there is no provision that allows any deductions for income tax purposes in respect of royalties, technical service fees or interest income.

Least Alternative Tax (MAT)

Minimum alternative tax is imposed on an enterprise’s distributed income, which is exempt from tax in India. This tax is levied at the rate of 30%, which is the ‘least alternative tax’. Mat tax on savings bank deposits and returns from public provident fund (PPF) schemes, fixed deposits, post office schemes and lotteries are considered as part of taxable income for computing the amount of the MAT payable.

Organisations Liable to Pay MAT

All organisations, private or public, Indian or foreign companies, are at risk to pay MAT. This is on the off chance that the payable duty is under 15% of the book benefit in addition to cess and overcharge.

Special cases under Minimum Alternative Tax (MAT):

  1. Capital gains made on the sale of assets are exempt until the date of commencement of business operations. After that, they will be taxable as if they were salaried incomes.
  2. Capital gains arising on transfer of an asset by a non-resident to another non-resident: MAT is levied at 30% in such cases.
  3. Capital gains arising on transfer of an asset by a non-resident to a resident: MAT is levied at 30% in such cases.
  4. Capital gains arising on transfer of an asset by a resident to another resident: MAT is not applicable in such cases.
  5. Resident companies are exempt from paying MAT in respect of income from the repurchase of their own shares. The income is included in the computation of MAT to determine the credit available to them against the tax payable on undistributed profits.
  6. Certain enterprises are exempt from paying MAT in respect of income received, whether directly or indirectly, from foreign governments. The said exemption applies equally to both the distributed and undistributed income of these enterprises.

Conclusion

The arguments about minimum alternative tax are turning into a battle in court. On April 7, 2015, The Financial Express cited India’s income secretary as saying, “The public authority has clarified that a legitimate response is available to the foreign portfolio investors.” India is improving its tax collection framework and attempting to close existing escape clauses. With this, public authorities and private financial backers are supposed to utilise the loopholes for their benefit. In this manner, FIIs need to ensure that their duty is current and precise to account and administrative filings.