Tax Club

Minimum Alternative Tax

Created on 21 Aug 2018

Wraps up in 3 Min

Read by 3.7k people

Updated on 11 Sep 2022

Companies often have tendency to escape the taxes, to get more and more profit, and in order to escape it, they often become “zero tax companies” i.e. those companies which incur high profit but gets exempted from paying taxes by using undue advantages of various deductions, incentives tools provided to them for their benefits.

What Purpose Minimum Alternative Tax (MAT) Serves

MAT is basically a safety instrument that government has, to keep a keen check on the companies that tends to escape the taxes. It is introduced to ensure that every company pay tax.

Normally, a company is liable to pay tax as per the provisions laid under Income Tax Act, and the profit and loss account of a company is made with the accordance of Companies act. However, in the past era, companies showed profit on their profit and loss account and, at the same time distributed same dividends to their share-holders and depicted nil or negative income and became zero-tax companies, despite of having high book profits.

Book Profit

A profit as shown in company’s account. Basically, a profit not in actual money, but from the increase in the value of an asset.’ Thus, with the use of book profits, no company can make fool by showing nil profits.

In order to bring such companies under the liability to pay taxes and come under the Income tax circle, Section 115JB was introduced in Income Tax Act, 1961. Now, all the companies that record a book profit shall have to pay a Minimum Alternative Tax i.e., 18.5% plus surcharge and cess as applicable under the Companies Act. This method is adopted by large number of companies and is been considered apt and suitable and very much successful. In India, where there are lot of exemptions provided in the Income Tax Act, this step turned out to be very much successful and now it is very difficult for the companies to get escape from the taxes.

Which Companies are liable to pay Minimum Alternative Tax?

It is applicable on all the Companies. Expect the companies dealing with:-

1. Infrastructure

2. Power

Other incomes coming from free trade zones, charitable activities are also exempted from this tax liability.

These companies are exempted because more or less, these companies have chances to incur zero profit, or nil profits.

Does Minimum Alternative Tax make the Companies to pay taxes twice?

Well the answer is no, as this is a tool and a step taken by the government to make sure that every company is paying tax, as the companies can make high profits and show no income; to skip the taxes. It is just like equalizer and these taxes are computed considering the book profit and not tax profit. Minimum Alternative tax is just like a tax paid in advance, which can be reduced from future tax liabilities.

For example- Book profit before depreciating of a company is Rs.15, 00,000. After claiming depreciation and other exemptions, gross taxable income comes to Rs. 6, 00,000. The income tax applicable is Rs. 1, 80,000 However; Minimum Alternative Tax would be Rs. 2,77,500.

Thus, the balance can be used in the next payable year, it is not lost or taken, it is always in the records and it is not at all double payment of taxes, it's just simply paying in advance.

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Ayushi Upadhyay

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A Keen Learner. Tiny, brainy, and studious, this quiet one stays in her zone until she pops. And once she does, boy, are her comebacks snappy! There is no financial question that she can't answer through her magical blog-writing. 

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