The Minimum Alternative Tax (MAT) is a provision in the Income Tax Act of India that ensures companies with significant profits and substantial operations do not avoid paying taxes by taking advantage of various deductions, exemptions, and incentives provided by the tax laws. The MAT was introduced to address the issue of certain companies showing substantial book profits but not paying any tax due to various tax adjustments and deductions.
Key Features of MAT:
Applicability: MAT is applicable to all companies registered in India, including foreign companies operating in India.
Computation of Tax Liability: Companies have to calculate their tax liability under both the regular provisions of the Income Tax Act and the provisions of MAT. The higher of the two tax liabilities is then payable by the company.
Rate of MAT: The rate of MAT is prescribed by the government and is usually a percentage of the company’s book profits. The rate may change from year to year based on government policies.
Book Profits: The starting point for calculating MAT liability is the “book profits” of the company, which is computed as per the provisions of the Income Tax Act with certain adjustments.
Tax Credit: Any excess MAT paid in a year can be carried forward and set off against the regular tax liability in subsequent years. The tax credit can be carried forward for up to 15 assessment years.
Exemptions: Certain types of companies or income are exempted from the applicability of MAT, such as those engaged in infrastructure development or those located in special economic zones (SEZs).
Foreign Tax Credit: For foreign companies, MAT paid in India may be eligible for foreign tax credit in their home country, subject to the provisions of the respective tax treaties.
Purpose of MAT:
The primary objective of MAT is to ensure that companies pay a minimum amount of tax, irrespective of the deductions and incentives they may be eligible for under the regular provisions of the Income Tax Act. This prevents large companies from exploiting loopholes in tax laws and ensures that they contribute their fair share of taxes to the government’s revenue.