Understanding Minimum Alternate Tax (MAT) in the Indian Tax System
Introduction to MAT in the Indian Tax Law
The term Minimum Alternate Tax (MAT) is often used in the Indian tax context and particularly in the tax regime of companies. MAT was introduced by the Finance Act, 1987, as a provision under Section 115J of the Income Tax Act, 1961.
This tax was introduced to address the issue of companies showing zero or negligible income to avoid paying taxes. Let's delve into what MAT is, its purpose, and how it functions within the Indian tax system.
The Introduction of MAT
MAT, which stands for Minimum Alternate Tax, was brought into effect as part of the Finance Act, 1987 under Section 115J of the Income Tax Act, 1961.
The primary aim of introducing MAT was to ensure that companies, which were otherwise profiting and paying dividends without actually paying taxes, were compelled to pay an adequate amount of tax. This was to combat tax avoidance among companies that disposed of profits by claims for tax deductions and exemptions under various sections of the Income Tax Act.
How MAT Functions
Purposes of MAT
One of the key purposes of imposing MAT is to reduce tax avoidance. It ensures that even companies with the ability to pay taxes but using loopholes to avoid it, are compelled to contribute a minimum amount of tax.
MAT is typically applied when the company's taxable income, as per the normal provisions of the Income Tax Act, 1961, is found to be less than 18.5% of the book profit.
When such a scenario arises, the company is liable to pay tax at a rate of 18.5% of the book profits, including any surcharge and cess applicable as per the prevailing tax laws.
Taxability and Liability
The MAT rate has been progressively increased over the years. For instance, it started at 7.5% in 2000 and rose to 18.5% in 2015. The tax amount calculated by applying 18.5% on book profits, including applicable surcharge and cess, is referred to as the MAT.
The Normal tax rate for an Indian company is currently 30%, inclusive of applicable cess and surcharge. The company has to pay the higher of the normal tax liability or the liability as per the MAT provisions.
Applicability and Exceptions
MAT applies to all corporate entities, whether public or private, with a few exceptions. Notably, it does not apply to income accrued from life insurance businesses or shipping incomes liable to tonnage taxation, as per Sections 115V to 115VZC of the Income Tax Act, 1961.
Furthermore, MAT provisions are applicable to all companies and units, except those located in International Financial Services Centers (IFSCs) deriving income in convertible foreign exchange. These specially designated units are only exempt from MAT for nine years as a specific financial incentive.
Reasons for Introduction of MAT
The introduction of MAT was primarily aimed at addressing the imbalance in the tax regime, particularly where companies were reporting negligible or zero taxable income through the strategic use of various tax deductions and exemptions under the Income Tax Act, 1961.
Many companies were using these loopholes to avoid paying taxes, thereby creating a disparity in the tax burden among compliant taxpayers. MAT was introduced to ensure that these companies faced a minimum tax liability to meet their tax responsibilities.
How MAT Affects Corporate Tax Liability
In the event that the tax liability as per the normal provisions of the Income Tax Act, 1961 is higher than the tax liability as per the MAT provisions, the company can take the MAT credit. This credit can be utilized to offset any shortfall in the normal tax liability.
This provision is designed to ensure that companies do not end up paying less tax than they otherwise would have, even if they manage to reduce their taxable income through legitimate deductions and exemptions under the Income Tax Act.
Conclusion
In conclusion, Minimum Alternate Tax (MAT) is an essential component of the Indian tax system designed to address and combat tax avoidance. By compelling companies to contribute a minimum amount of tax even when they attempt to show lower taxable incomes, MAT ensures that the tax regime remains fair and balanced. Understanding MAT is crucial for businesses operating in India to remain compliant and avoid potential penalties.