Minimum Alternate Tax (MAT) [Section 115JB]

Introduction

Minimum Alternate Tax (MAT) was introduced to ensure that companies pay taxes on their profits as per books of accounts as they report higher profits in the books but pay little or no tax as per the provisions of the Income Tax Act. However the companies are allowed to carry forward this MAT credit to the subsequent years when their tax liability under the provisions of the Act exceeds the MAT payable.

Applicability of MAT

Minimum Alternate Tax (MAT) is applicable to companies (both domestic and foreign companies). MAT is applicable when the tax payable on the total income as computed under the income tax act is less than 15% of the book profit.

If the book profit is higher than the total income as computed under the income tax act then such book profit shall be deemed to be the total income of the assessee and the tax shall be payable at the rate of 15% (surcharge shall be applicable at the rate of 7% for domestic companies and 2% for foreign companies if the total income exceeds ₹ 1 crore but does not exceeds ₹ 10 crore, and 12% for domestic companies and 5% for foreign companies where the total income exceeds ₹ 10 crore). Further health and education cess at 4% shall be added to the tax and surcharge.

Adjustments to be made for computation of Book Profit

The profit shall be increased by the following amounts if the items mentioned below are debited to the statement of profit & loss.

(a) Income Tax : The amount of income-tax paid or payable, and the provision therefor; or

Income Tax includes :

• any tax on distributed profits under section 115-O or on distributed income under section 115R;
• any interest charged under this Act;
• surcharge, if any, as levied by the Central Acts from time to time;
• Education Cess on income-tax, if any, as levied by the Central Acts from time to time; and
•  Secondary and Higher Education Cess on income-tax, if any, as levied by the Central Acts from time to time.

(b) Amounts carried to reserves: the amounts carried to any reserves, by whatever name called, other than a reserve specified under section 33AC; or

(c) Provisions: the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities; or

(d)Provision for losses of subsidiary companies: the amount by way of provision for losses of subsidiary companies; or

(e) Dividends: the amount or amounts of dividends paid or proposed ; or

(f) Expenditure related to exempt income: the amount or amounts of expenditure relatable to any income to which section 10 (other than the provisions contained in clause (38) thereof) or section 11 or section 12 apply; or

(fa) Expenditure relatable to income, being share of the assessee in the income of AOP or BOI: the amount or amounts of expenditure relatable to income, being share of the assessee in the income of an association of persons or body of individuals, on which no income-tax is payable in accordance with the provisions of section 86; or

(fb) Expenditure relatable to income accruing to foreign company: the amount or amounts of expenditure relatable to income accruing or arising to an assessee, being a foreign company, from,—

• (A) the capital gains arising on transactions in securities; or
• (B) the interest, dividend, royalty or fees for technical services chargeable to tax at the rate or rates specified in Chapter XII,
  
  if the income-tax payable thereon in accordance with the provisions of this Act, other than the provisions of this Chapter, is at a rate less than 15%

(fc) Notional loss on the units of business trust: the amount representing notional loss on transfer of a capital asset, being share of a special purpose vehicle, to a business trust in exchange of units allotted by the trust referred to in clause (xvii) of section 47 or the amount representing notional loss resulting from any change in carrying amount of said units or the amount of loss on transfer of units referred to in clause (xvii) of section 47; or

(fd) Amount of expenditure relatable to income u/s 115BBF: the amount or amounts of expenditure relatable to income by way of royalty in respect of patent chargeable to tax under section 115BBF; or

(g) the amount of depreciation,

(h) the amount of deferred tax and the provision therefor,

(i) the amount or amounts set aside as provision for diminution in the value of any asset,

(j) the amount standing in revaluation reserve relating to revalued asset on the retirement or disposal of such asset,

(k) Amount of gain arise on transfer units of business trust: the amount of gain on transfer of units referred to in clause (xvii) of section 47 computed by taking into account the cost of the shares exchanged with units referred to in the said clause or the carrying amount of the shares at the time of exchange where such shares are carried at a value other than the cost through statement of profit and loss as the case may be;

The profit shall be reduced by the following amounts:

(i) Amount withdrawn from any reserve: the amount withdrawn from any reserve or provision if any such amount is credited to the statement of profit and loss.

However the amount withdrawn from reserves/provisions shall not be reduced from the book profit unless that book profit has been increased by those reserves/provisions.

(ii) Exempt Income: the amount of income to which any of the provisions of section 10 except for section 10(3) or provisions of section 11 or section 12, if such amount has been credited to the statement of Profit & Loss.

(iia) Depreciation: the amount of depreciation debited to the statement of profit and loss (excluding the depreciation on account of revaluation of assets)

(iib) Amount withdrawn from revaluation reserve: the amount withdrawn from revaluation reserve and credited to the statement of profit and loss, to the extent it does not exceed the amount of depreciation on account of revaluation of assets referred to in clause (iia);

(iic) Share of the assessee in the income of an AOP or BOI: the amount of income, being the share of the assessee in the income of an association of persons or body of individuals, on which no income-tax is payable in accordance with the provisions of section 86, if any, such amount is credited to the statement of profit and loss;

(iid) Income accruing to foreign company: the amount of income accruing or arising to an assessee, being a foreign company, from:

• the capital gains arising on transactions in securities; or
• the interest, dividend, royalty or fees for technical services chargeable to tax at the rate or rates specified in Chapter XII,

if such income is credited to the statement of profit and loss and the income-tax payable thereon in accordance with the provisions of this Act, other than the provisions of this Chapter, is at a rate less than 15%.

(iie) Notional gains on the units of Trusts: the amount representing,

• notional gain on transfer of a capital asset, being share of a special purpose vehicle to a business trust in exchange of units allotted by that trust referred to in clause (xvii) of section 47; or
• notional gain resulting from any change in carrying amount of said units; or
• gain on transfer of units referred to in clause (xvii) of section 47,

if any, credited to the statement of profit and loss; or

(iif) Loss on transfer of units: the amount of loss on transfer of units referred to in clause (xvii) of section 47 computed by taking into account the cost of the shares exchanged with units referred to in the said clause or the carrying amount of the shares at the time of exchange where such shares are carried at a value other than the cost through statement of profit and loss, as the case may be; or

(iig) Income by way of Royalty: the amount of income by way of royalty in respect of patent chargeable to tax under section 115BBF; or

(iih) Brought forward loss and unabsorbed depreciation: the aggregate amount of unabsorbed depreciation and loss brought forward in case of a—

• company, and its subsidiary and the subsidiary of such subsidiary, where, the Tribunal, on an application moved by the Central Government under section 241 of the Companies Act, 2013 (18 of 2013) has suspended the Board of Directors of such company and has appointed new directors who are nominated by the Central Government under section 242 of the said Act;
• company against whom an application for corporate insolvency resolution process has been admitted by the Adjudicating Authority under section 7 or section 9 or section 10 of the Insolvency and Bankruptcy Code, 2016

(iii) Brought forward loss and unabsorbed depreciation for companies other than (iih): the amount of loss brought forward or unabsorbed depreciation, whichever is less as per books of account in case of a company other than the company referred to in clause (iih).

(vii) Profits of sick industrial company: the amount of profits of sick industrial company for the assessment year commencing on and from the assessment year relevant to the previous year in which the said company has become a sick industrial company under sub-section (1) of section 17 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986) and ending with the assessment year during which the entire net worth of such company becomes equal to or exceeds the accumulated losses.

(viii) Deferred Tax: the amount of deferred tax, if any such amount is credited to the statement of profit and loss.

Conclusion

The provisions of MAT credit will be applicable when the companies tax liability as per the provisions of the income tax act is lesser than the tax payable on the actual book profit of the company at the rate of 15% after giving effect to the above mentioned adjustments. It is important for the companies to check whether the provisions of the MAT are applicable for said assessment year.

By keeping track of the MAT paid and the balance available in MAT credit, the companies can take better decisions and their plan their operations accordingly.

Frequently Asked Questions (FAQs) on MAT Credit

1. What is MAT Credit under the Income Tax Act?

MAT credit is the difference between the tax paid under Minimum Alternate Tax (MAT) and the normal tax liability. This excess can be carried forward and set off in future years when the normal tax becomes higher than the MAT payable.

2. How long can MAT Credit be carried forward?

MAT credit can be carried forward for a period of 15 assessment years from the year in which it is first allowed.

3. Can MAT Credit be refunded?

No, MAT credit cannot be refunded. It can only be set off against future tax liabilities when the normal tax exceeds MAT.

4. Under which section is MAT Credit governed?

MAT credit is governed by Section 115JAA of the Income Tax Act, 1961.

5. When can MAT Credit be utilized?

MAT credit can be utilized in a year when the tax payable under the normal provisions of the Income Tax Act is greater than the MAT liability.

6. Who is not liable to pay MAT (Non-applicability of MAT)?

MAT provisions are not applicable to the following categories of taxpayers:

• Income of companies engaged in insurance or banking business.
• Companies engaged in the generation or distribution of electricity.
• Foreign companies that do not have a permanent establishment (PE) in India.
• Foreign companies whose total income consists only of capital gains, interest, royalty, or fees for technical services, and tax has been deducted under section 115A or similar provisions.

These exemptions ensure that MAT is applied only to relevant entities and avoids duplication of tax in special sectors.

7. What is the applicable form to file MAT Credit?

MAT credit details are to be reported in the Income Tax Return (ITR) form applicable to the company, such as ITR-6. The specific schedule for MAT and MAT Credit — generally called the Schedule MATC — must be filled out to disclose the amount of MAT paid, credit carried forward, and credit set off during the year.

8. Is MAT Credit required to be audited by a Chartered Accountant?

Yes. Under Section 115JB(4) of the Income Tax Act, every company liable to pay MAT must get its accounts audited by a Chartered Accountant and obtain a report in the prescribed format — Form No. 29B. This audit report certifies the computation of book profits and MAT liability, forming the basis for determining MAT credit.