What is Minimum Alternate Tax-MAT Tax/MAT Calculation

What is Minimum Alternate Tax Under Section 115JB?

Minimum Alternate Tax or MAT– The name itself suggests that if the tax payable by a Company to the Govt. as per the provisions of I.T Act, falls below a certain level, the Company has to pay taxes on the Minimum Alternate Tax (MAT) basis. This is called MAT Tax. So, the tax payable on book profits to be calculated in different ways.

What is MAT Tax?

As per section 115JB of the Income Tax Act, if for any previous year for a company the tax payable on the total income as calculated on the basis of the Income Tax Act, falls below 15% (Earlier it was 18.50%) of its book profits, such book profits shall be deemed to be the total income of that company and Minimum Alternate Tax has to be paid @15% of such book profits.

Further, the profit & loss account must be prepared in accordance with the provisions parts II & III of the Schedule VI of the Companies Act.

Therefore, section 115JB says that the company assesses are to pay MAT Tax @15% on their book profits if the tax payable on the basis of total income as calculated as per income tax act is less than 15% of the book profits. Thus, the tax has to be paid higher of the following two:

MAT Tax- Higher of the two: (i). Tax payable on the basis of total income as coming from the Profit & Loss Account and (ii) Tax @15% on the Book Profits

Minimum Alternate Tax or MAT Tax does not mean that all the companies are not paying taxes. This provision is meant for inclusions of more and more companies under the tax net so that Government revenue in the form of direct tax collection gets increased.

You may like to Download the below Income Tax Excel Calculator for F.Y 2020-21

There are plenty of previous instances where big companies earning huge profits, did not pay adequate taxes on income due to claiming more and more deductions on book profits and also paying dividends. This has led to lower net income and lower revenue for the Government.

What is MAT rate for AY 2020 21?

From F.Y 2019-20 and A.Y 2020-21, the MAT Tax rate is 15% Plus Surcharge if applicable Plus 4% Cess (Earlier it was 18.50%) of Book Profits i.e. the Net Income as coming from the Profit & Loss (P&L A/C) account after adding and deducting certain items.

Calculation of Book Profit for MAT Tax

While calculating book profits under section 115JB of the Income Tax Act for obtaining Minimum Alternative Tax the net profits as derived from the P&L account are to be adjusted for the following incidents:-

The following amounts are to be added back to Net Profits if these were debited to the P&L account in the previous year:

1. Income Tax paid or payable if any and provisions made, therefore;
2. The amount of reserve transferred by whatever name it is called;
3. Provisions made for loss of subsidiary companies if any;
4. Provisions made for meeting contingent liabilities;
5. Dividend paid or proposed;
6. Depreciation calculated as per the provisions of the companies act including the depreciation for revaluation of assets;
7. Provision for Deferred Tax or the amount of deferred tax;
8. Amount of expenditure incurred in relation to exempt income u/s 10,11 & 12  like Long Term Capital Gain Tax is to be considered for MAT. 

The following amounts are to be deducted from Net Profits if these were credited to the P&L account in the previous year:

1. Amount of reserve withdrawn;
2. Exempt income u/s 10,11 & 12;
3. If an amount is withdrawn from Revaluation Reserve and credited to the P&L account;
4. Any amount if any is  withdrawn from revaluation reserve and credited to P&L account;
5. Amount of deferred tax if any are credited to the P&L account;
6. Amount of loss brought forwarded and unabsorbed depreciation if any;

MAT Calculation

If it is seen that taxes paid by a company assessee in a previous year on the basis of the net income or net profits as derived from the P&L account is not adequate, the net profits would have to be adjusted (addition to & deduction from net profits) with the above mentioned allowable and disallowable items to arrive at Book Profits for calculation of Minimum Alternate Tax.

Example: A company XYZ  has a net income as per the provisions of Income Tax Act of ₹50 Lakh and Book Profits of ₹90 Lakh in F.Y 2019-20. Now calculate what will be XYZ’s tax liability for F.Y 2019-20? Assume the tax rate for XYZ is 25% and CESS @4%

MAT Calculation: Net Profits ₹50 Lakh. Book profits ₹90 Lakh. Therefore Tax payable will be higher of the following two:

1. Tax liability as per normal provisions is 25% of 50 Lakh plus 4% Cess i.e. ₹13,00,000;
2. Tax liability as per MAT is 15% of 90 Lakh plus 4% Cess i.e. ₹14,04,000.

Thus, the company XYZ has to pay tax liability as per Section 115JB of the Income Tax Act is ₹14,04,000.

How is MAT credit utilised u/s 115JAA?

If in any financial year the taxes paid by a company under MAT exceeds the tax to be payable under the normal provisions of the Income Tax Act, the company is eligible to get MAT credit.

MAT Credit= Tax payable under MAT > Tax payable on Net Income i.e. ₹14,04,000- ₹13,00,000 = ₹ 1,04,000.

This MAT credit is now permitted to be carried forward up to 15 Assessment years w.e.f A.Y 2018-19 as per section 115JAA. Also, the set-off of MAT credit is permitted in a year only when if the tax becomes payable under the normal provisions of the Income Tax Act is greater than the tax payable under MAT.

Maximum ceiling of MAT credit is the difference of tax payable under normal provisions on total income and tax payable under section 115JB of Income Tax Act.

In line with the above example, MAT credit can be set off up to ₹6,933 per year for 15 A.Y with a condition that the maximum amount will be lower of the ₹6,933 or the difference between the tax payable under normal income tax provision is greater than the tax payable under MAT.

MAT calculation with practical example

Now let’s solve an example to calculate Minimum Alternate Tax. XYZ a garment retailers company reported the following details for the F.Y 2018-19. The following information is gathered from the P&L statement.

Particulars of ArthikDisha Ltd.	Amount(₹)
Gross Revenue from Sale Proceeds	70,00,000.00
Income from other business activities	12,00,000.00
Total Revenue from business operations	82,00,000.00
Amount withdrawn from General reserves by debiting P&L account	6,50,000.00
Amount withdrawn from Revaluation reserves	2,50,000.00
Total Income	91,00,000.00

Less: Expenses
Depreciation as per Companies Act	7,80,000.00
Depreciation for Revaluation of Assets	3,50,000.00
Employees Salaries and Wages	13,00,00.00
Income Tax	9,20,000.00
Other Expenses	1,50,000.00
Proposed Dividend	2,10,000.00
Provision taken for contingent liabilities	1,25,000.00
Net Profits	52,65,000.00

Additional Information:
Depreciation as per Section 32	6,50,000.00

For Tax Purposes:
Brought forwarded losses for F.Y 2017-18	18,50,000.00
Unabsorbed Depreciation	NIL
For Accounting Purposes:
Brought forwarded losses for F.Y 2017-18	5,75,000.00
Unabsorbed Depreciation	1,90,000.00

MAT Calculation is shown as below:

Calculation of Minimum Alternate Tax as per Section 115JB	Amount(₹)
Net profits as per Profit & Lass account	52,65,000.00
Add: Disallowed items/Items to be added back
Depreciation(780000+350000-650000)	4,80,000.00
Income Tax	9,20,000.00
Proposed Dividend	2,10,000.00
Provision for contingent liabilities	1,25,000.00
Gross Total Income	70,00,000.00
Less: Items to be deducted
Amounts withdrawn from Reserves(250000+650000)	9,00,000.00
Unabsorbed Depreciation	1,90,000.00
Book Profits as per Section 115JB	59,10,000.00
So, Minimum Alternate Tax or MAT Tax	9,21,960.00
MAT Tax rate is 15% plus Cess @4% (5910000*15%*1.04)