Minimum Alternative Tax (MAT)

Why in news

• The Finance Ministry said companies opting for the lower corporate tax rate of 22% will not be allowed to reduce their tax liability by claiming deductions towards additional depreciation and Minimum Alternative Tax (MAT) credits.

Minimum Alternative Tax (MAT):

• It is the minimum tax imposed on book profit of companies who record nil or negligible profit to pay the usual corporate income tax.
• Book profit means the net profit as shown in the profit & loss account for the relevant previous.
• It is applicable to all companies, except those engaged in infrastructure and power.
• The income arising from free trade zones, charitable activities, and investments by venture capital companies are also excluded from the purview of MAT.
• Foreign companies with income sources in India are liable to pay MAT.
• All companies that record a book profit shall have to pay a minimum alternate tax of 5% (plus surcharge and cess as applicable) under the Companies Act.

Why it is imposed?

• There were several companies who had book profits as per their profit and loss account but were not paying any tax because income computed as per provisions of the income tax act.
• The Income Tax Act allows companies to claim certain exemptions, deduct certain expenses and make various provisions to while calculating taxable income.
• Because of these exemptions and deductions, the taxable profit may become zero despite having substantial book profit.
• These companies are popularly known as Zero Tax companies.
• The MAT brings them under tax net by imposing a tax on their book profit as an alternative minimum tax.

• So, even if there is no payment of the usual income tax, the zero tax companies have to pay the MAT which is a based upon the book profit.

• MAT provisions says that a company has to pay MAT if the normal tax (income tax) payable by it is less than the MAT and that the MAT is to be computed with reference to its Book Profit as per Profit and Loss Account.