Minimum Alternative Tax (MAT)

Date: April 28, 2015

The concept of MAT was introduced under ITA to tax companies making high profits and declare dividends to their shareholders but have no significant taxable income because of exemptions, deductions and incentives.The primary cause is not tax evasion or a lack of adequate government policies but the feature of tax system – incentives, deduction and exemptions.

The intent of introducing MAT was to ensure that no taxpayer with substantial income can avoid tax liability by using exclusions, deductions and incentives.The Companies Act and Income Tax Act deals in different situation hence they both have different provisions regarding allowable expenditures.The expenses disallowed under companies act are also disallowed under income tax act, but there are some expenditure which are disallowed under income tax but still allowed to be deducted while calculating the profits under Companies Act.With the result of such provisions the companies are able to reduce their profits and pay low revenue to the credit of government.

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In the past, a large number of companies showed book profits on their profit and loss account and at the same time distributed huge dividends. However, these companies didn’t pay any tax to the government as they reported either nil or negative income under provisions of the Income-Tax Act.These companies were showing book profits and declaring dividends to their shareholders but were not paying any tax. These companies are popularly known as ‘zero tax’ companies.

In order to bring such companies under the I-T net, Section 115JA was introduced from assessment year 1997-98. Now, all companies having book profits under the Companies Act shall have to pay a minimum alternate tax at 18.5%.

MAT is a way of making companies pay minimum amount of tax. It is applicable to all companies except those engaged in infrastructure and power sectors. Income arising from free trade zones, charitable activities, investments by venture capital companies are also excluded from the purview of MAT. However, foreign companies with income sources in India are liable under MAT.