Shivam
Accounting & Tax

Minimum Alternate Tax and its Eligibility

Contents hide

1 Introduction

2 History behind Minimum Alternate Tax Regime

3 Applicability and Eligibility of Minimum Alternate Tax

4 MAT Credit

5 Analysis of provision of section 115JB

6 Conclusion

7 Reference

7.1 Related

Introduction

To ensure equity in society, it is necessary that every individual who has the economic capacity and capability to contribute should be required to bear a certain amount of share of the country’s tax load. With this belief in mind, the concept of Minimum Alternate Tax (MAT) was introduced in India by the Finance Act in the year 1987 vide Section 115J of the Income Tax Act of 1961^[1]. The main aim behind the introduction of MAT was to ensure that no person/ entity with substantial economic income can avoid paying tax. It also aimed at taxing ‘zero-tax’ companies.

Zero tax Companies are the Companies that show negligible income to avoid the paying of taxes. These companies generally make high profits and provide a substantial amount of dividend to their shareholders

but do not pay any significant taxes because of the deductions, exemptions, and incentives provided to them. MAT is in conformity with a fundamental principle of the law of taxation – all entities must be taxed in proportion to their ability to pay^[2].

History behind Minimum Alternate Tax Regime

The first legislative step towards addressing the issue of zero-tax companies was made in the year 1983 with the addition of Section 80VVA to the Income Tax Act^[3]. The provision provided that the aggregate amount of deductions that a company could make in one year could not exceed 70% of the total income. This provision, however, proved to not be successful in preventing companies from avoiding tax liability. In 1987, this provision was replaced with Section 115J which determined taxable income with respect to book profits.

Book profits were defined as the net profits shown in the profit and loss account for the previous year and if the total taxable income of a company was less than 30% of its book profits, then the total income to be taxed was deemed to be 30 % of the book profits, and the total income was thus taxed at the applicable rate. This led to Companies keeping two sets of accounts- one for calculating total taxable income under the provisions of the Income Tax Act and the second for book profits under the provisions of the Companies Act. At the end of the year, companies were liable to either pay tax on the amount calculated under the general provisions of the Income Tax Act or on the book profits calculated under the MAT provisions,

whichever was higher. This provision was repeal in 1990.

The provisions relating to MAT were re-introduce in the year 1997 and the concept of MAT Credit was introduce. In 2000, the previously brought about provisions were replace and the provisions relating to MAT credit were repeal. They were however re-introduced in 2005

Applicability and Eligibility of Minimum Alternate Tax

MAT was introduced as an attempt to reduce or prevent the avoidance of income tax by economically well-off people. Under the taxation Laws of India, the Companies which are usually not made liable to pay income tax because of the exemptions and/ or

benefits grant to them are otherwise make liable to pay MAT. It is applied in the situations where the taxable income calculated as per the provisions of the IT Act is found to be less than 18.5% of the book profits^[4].

The rate at which it was consider increase from 7.5% in 2000 to 18.5% in 2015 under the budget that was

announced in that fiscal year. Therefore, in simpler terms, MAT is the tax compute by applying 18.5% interest on the book profit. It is applicable on all corporate entities – public or private exclusive of Insurance Companies because the profit and loss account of such Companies are not required to be prepared as per the part II of Schedule VI of Companies Act^[5], which is a basic requirement for computation of book profit under Section 115JB^[6].

MAT Credit

MAT credit is a beneficial provision for companies based on principles equity^[7]^[8]. In a situation where the amount of MAT for a company is greater than its usual tax liability, the difference that comes between MAT and normal tax liability is know as MAT Credit⁸. Thus, MAT credit is the difference between the tax calculate under the provisions

given for MAT and the tax calculated under the general provisions of the ITA in other words, normal tax liability. MAT credit can be carry forward and set-off for ten assessment years immediately succeeding the assessment year

in which the tax credit was first computed^[9]. Thus, companies must make sure to always calculate both – their normal tax liability and their liability under MAT and should pay whichever is higher. If, however, the company pays MAT in a

particular assessment year, then it can avail of credit over and above the normal tax liability. This, in simple terms implies that in no year will the company pay tax less than the MAT tax rate.

Analysis of provision of section 115JB

Where in case of a company, the income tax payable on the total income as computed under the income tax act in respect of any previous year is less than 15% of its BOOK PROFIT, then such book profit shall be deem to be the

total income of the assessee and the tax payable on such total income shall be the amount of income tax at the rate of 15%. This income tax is, further has to be enhance by surcharge (as applicable) and education cess (@4%).

In the simple words every company has to compute its income tax liability as per two sets of provisions. The set of provisions which results in higher income tax liability become the income tax payable are:

1). Income tax computed as per normal provisions of income tax act.

2). Income tax computed as per provision of section 115JB of income tax act.

Conclusion

The clamor for comprehensive reform of our tax system has existed for many years and continues to mount. Adoption of the minimum tax regime and an enlarged minimum standard for reduction or deduction in taxes does not solve all the problems concerning people who practice tax evasion. However, it has taken a step towards bringing uniformity in

the tax regime and in making economically stable people pay their share of tax. However, this step towards reform should not be the last as there is still a long way to go.