Minimum Alternate Tax (MAT): Concept, Calculation and Credit u/s 115JB

What is MAT – Minimum Alternate Tax?

MAT stands for Minimum Alternate Tax, described as a direct tax that has to be paid by the companies that are enjoying tax benefits or tax exemptions, instead of having huge profits, under various schemes framed under Income Tax Act.

Now after the insertion of MAT they have to pay a particular amount of tax termed as MAT, so they come under the tax net under section 115JB.

Applicability of MAT

Provisions of MAT are applicable to all companies including foreign companies whose liability to pay income tax calculated as per normal provisions are less than the liability under MAT provisions.

Calculation of MAT

Before proceeding on how MAT is calculated, first provisions related to MAT calculation is important to learn:

1. Income tax Payable shall be the higher of the following amounts:

  • Tax on total income computer as per the normal provisions of the Income Tax Act (30% on domestic companies and 40% on foreign Companies)
    • Add Surcharge: If total income exceeds Rs. 1 crore
      • Domestic Companies: 5%
      • Foreign Companies: 2%
  • Less Marginal Relief, if total income exceeds Rs.1 crore {Formula: Tax on Rs. 1 crore + (Total Income – Rs. 1 crore)}
  • Education Cess: 3% on Tax Payable + Surcharge.
  • Tax on total income computer under MAT provisions (at present 18.5%)
    • Add Surcharge: If total income exceeds Rs. 1 crore
      • Domestic Companies: 5%
      • Foreign Companies: 2%
  • Less Marginal Relief, if total income exceeds Rs.1 crore {Formula: Tax on Rs. 1 crore + (Total Income – Rs. 1 crore)}
  • Education Cess: 3% on Tax Payable + Surcharge.

Minimum Alternate Tax aka MAT under Income Tax ActLet us understand with an example: Sanyam Ltd. has given you the following figures to calculate the tax payable for Assessment Year 2013-14.

  • Taxable Income as per normal provision of Income Tax Act – Rs. 50,00,000
  • Book Profits as per section 115JB – Rs. 1,01,00,000

First of all calculate tax as per normal provisions of Income Tax

  • Tax Payable @ 30% plus edu cess of 3% – 30.90% of 50,00,000 = Rs. 15,45,000
  • No Marginal Relief, since the income does not exceed Rs. 1 crore.

Now compute tax payable as per MAT provisions

  • Tax payable @ 18.5% + Surcharge @ 5% – 19.425% of Rs. 1,01,00,000 = Rs. 19,61,925.
  • Since Income Exceeds Rs. 1 crore, Marginal Relief is to be calculated (i.e. the amount of tax and surcharge cannot exceed the tax calculate under Marginal Relief)
    • Tax on Rs. 1 crore + (Rs. 1,01,00,000 – Rs. 1 crore) = Rs. 19,50,000
    • Total Marginal Relief = Rs. 19,61,925 – Rs, 19,50,000 = Rs. 11,925
    • Education Cess @ 3% on Rs, 19,50,000 = Rs. 58,500
    • Total Tax Payable under MAT = Rs. 19,50,000 + Rs. 58,500 = Rs. 20,08,500.

Hence, Tax Payable by Company = Rs. 20,08,000

There is a credit of MAT of Rs. 4,63,500, which can be carried forward to 10 assessment year.

MAT Credit under Section 115JAA

A tax credit scheme is introduced by which MAT paid can be carried forward for set-off against regular tax payable during the subsequent seven year period  subject to certain conditions, as under:-

  • When a company pays tax under MAT, the tax credit earned by it shall be an amount which is the difference between the amount payable under MAT and the normal tax. Normal tax in this case means the tax payable on the basis of normal computation of total income of the company.
  • MAT credit will be allowed carry forward facility for a period of 10 assessment years immediately succeeding the assessment year in which MAT is paid. Unabsorbed MAT credit will be allowed to be accumulated subject to the 10 year carry forward limit.
  • In the assessment year when regular tax becomes payable, the difference between the regular tax and the tax computed under MAT for that year will be set off against the MAT credit available.
  • In case of conversion of company into a Limited Liability Partnership under the Limited Liability Partnership Act, 2008, MAT credit available in hands of company shall not be allowed to the LLP.
  • The credit allowed will not bear any interest.

MAT credit can be better explained with the help of an illustration. So let’s try to understand it with the help of an example:

Asst YearTax Payable under MATTax Payable as per normal provisionsActual Tax payable*Tax Credit Available u/s 115JAATax Credit Set off/ adjustedTotal Tax Credit Available
2012-1311,43,3003,09,0001143,300834,300-8,34,300
2013-149,14,6404,94,4009,14,6404,20,240-12,54,540
2014-1513,33,85015,75,90013,33,850-2,42,05010,12,490
2015-165,71,6501,54,5005,71,6504,17,150-14,29,640
2016-1728,01,08548,66,74034,37,110-14,29,640**-
  • Tax Paid for the relevant assessment year cannot be less then tax computer in column 2.
  • Credit can be allowed to be adjusted to the maximum extent of total credit available.
  • No interest is payable on the tax credit available under section 115JAA.

MAT under new Direct Tax Code (DTC)

The new Direct Tax Code (DTC) initially proposed that MAT should be calculated on assets rather than book profit. i.e. 2% MAT on assets.

But the industry oppsed it saying, some companies have long gestation period (like real-estate, steel,cement etc) before they start seeing big profits, but these companies have to buy high-value assets since the beginning (land,machinery) to start and run their operations. so if MAT is calculated on their asset value, it’ll not be good for industrial growth. similarly if a company is making losses, it’ll still have to pay MAT for its assets. That’ll be like an insult to the injury!

Taking note of this objection, Government revised the DTC and said the MAT will be calculated on book-profits only.

I hope the concept of MAT is now well understood. Shoot any comment in case of query.

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  • Varsha Giria

    How to identify whether normal tax will be payable or MAT?

    • thesanyamjain

      Whichever is higher

  • Jyothsna

    If a company earns any income under house property or any other head of income, which is not its business income, and if tax payable as per book profits is more with respect to business income. Can the MAT credit be adjusted to tax payable on income from House property or any other head of income(which is not the business income)

    • thesanyamjain

      In my view mat credit can not be taken from other income.

  • Vishwanath

    ABC Pvt Ltd started its operations in FY 2011-12.
    It had a PBDT of Rs 2068235.00
    Depreciation as per Companies Act – Rs 50674.00
    Depreciation as per Income Tax Act – Rs 1734015.00
    Tax payable as per normal provisions is Rs 103274.00 [(2068235.00 – 1734015.00)*30.9%]

    Calculation of DTL
    o Diff in depreciation – Rs 1683341.00
    o Total Timing difference – Rs 1683341.00
    o So, DTL created – Rs 520150.00
    o DTL actually created by passing a journal entry as
    Deferred Tax A/c (P/L item) Dr 520150.00

    To DTL (Current Liability item) Rs. 520150.00

    As said earlier, the ABC Pvt Ltd had a PBDT of Rs 2068235.00

    MAT Calculation :
    o PBDT – Rs 2068235.00
    o Less : DTL Provision – Rs 520150.00
    o Book Profit for MAT – Rs 1548085.00
    o So, tax @19.055% – Rs 294988.00 say Rs 295000.00
    o Current tax provided by passing a journal entry as
    Income Tax A/c (P/L item) Dr 295000.00

    To Provision for Tax (MAT) for AY 2012-13 (Provision) Rs 295000.00

    As the Tax payable is more under MAT, assessee paid tax of Rs 300000.00 along with interest.

    Now here the MAT Entitlement is Rs 191726.00 (295000.00 – 103274.00)

    But, no entry was passed in that year for MAT Entitlement.

    Now my question is that,
    o Was the working for the year correct?
    o If anything is wrong can we correct the mistake in the current year i.e. FY 2012-13
    o How to pass entry relating to MAT entitlement.
    o How to pass all entries again in the FY 2012-13?

    Thanks in advance if replied

  • Hemanshu K.gohil

    Total Marginal Relief = Rs. 19,61,925 – Rs, 19,50,000 = Rs. 31,925
    the above calculation is wrong ….
    and can you tell me how it came 1950000?

    • thesanyamjain

      Thnx Hemanshu for pointing out the calculation mistake.

      Marginal relief gives the tax relief in case the income exceeds Rs. 1 crore by a sum, on which if tax is calculated exceeds the income over 1 crore rupess.

      In the above case tax on Rs. 1,01,00,000 comes to Rs. 19,61,925 including surcharge exceeds total tax on Rs. 1 crore plus income over Rs. 1 crore i.e. Rs. 1 lakh. So the marginal relief will be Rs. 11,925.

  • mohit dakalia

    nice article sanyam boss

    • thesanyamjain

      I am glad you like it Mohit…

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