Understanding Minimum Alternate Tax
Minimum Alternate Tax (MAT) is a type of indirect tax such as sales tax, service tax, value-added tax, commodity transaction tax (CTT) and securities transaction tax (STT) among others that’s is levied on companies.
Generally, a company pays taxes on its earned income on the basis of the provisions of the Income-Tax Act. However, company’s profit and loss (P&L) account is prepared as per provisions under the Companies Act.
Interestingly, a trend was witnessed in the near past (till early 1997) where companies showed profits in their books (also paid dividends) but didn’t pay tax to government for the reason they recorded negative or zero income as per provisions of the Income-Tax Act. This is what made these companies come to be known as “ZERO TAX” companies.
It is only possible as companies get a large number of tax exemptions from total income as per provisions of the Income-Tax Act along with permitted deductions from gross income and depreciation.
So, in order to impose tax on such companies under Income-Tax Act, government came up with Section 115JA for the year 1997-98. After that all companies which book profits had to pay a minimum alternate tax (MAT) at 18.5 per cent.
For instance, a company A has a profit (before depreciation) of Rs 7 lakh. Post claiming all depreciation and exemptions, gross taxable income comes to Rs. 4 lakh.
Now income tax should be Rs 1.2 lakh at 30 per cent rate. But, MAT comes to be Rs. 1.29 lakh (Rs. 7 lakh at 18.5%).
Also MAT can be carried forward and adjusted if regular tax is paid during following five-year period, but some conditions apply.
Companies exempted from paying MAT
Companies which are engaged in power and infrastructure sectors are exempted from MAT. In addition, any income that comes from charitable works, venture capital investments and free trade zones are also out of the purview of MAT but companies with foreign origins are not exempted.