Minimum Alternate Tax: What is it? How does it Work?

The Indian government continually tries to increase its tax collection albeit without putting an unwarranted burden on the taxpayers.

The majority of the taxes paid by the people in India fall under either of the categories- indirect taxes and direct taxes. The Minimum Alternate Tax, commonly known by its abbreviation MAT, belongs to the former.

What is MAT?

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MAT is an indirect tax levied under the Income Tax Act of India, 1961. As per section 115JB, every foreign and domestic company is required to pay MAT, a rule set up to prevent highly profitable businesses from dodging their tax liabilities.

A large number of companies in India try to evade taxes. For instance, many “zero tax companies” generate substantial revenues but end up paying a nil tax by applying deductions, exemptions and other kinds of loopholes in the system. So, MAT was created so that no company is able to completely evade their tax liability.

Features of MAT

The following are the two main features of MAT:

MAT Credit

If a company is paying MAT instead of the standard income tax, then in case the tax paid is higher than the actual amount accrued, the extra amount is credited back to the company in the form of tax credit.

Let’s take an example of a company X. Say, it generated a profit of Rs. 10 lakh and declared a taxable income of Rs. 5 lakhs after making all the deductions.

Now, the regular income tax in this situation would be 20% of Rs. 5 lakh, i.e. Rs. 1 lakh or Rs. 100,000

The MAT would be 18.5% of Rs. 10 lakh i.e. Rs. 185,000

Excess tax= Rs. 185,000- Rs. 100,000= Rs. 85,000

This excess amount will be credited to the company as Tax Credit.

Advance Payment of Tax

As per the Income Tax Act, if the tax liability of an individual is above Rs. 10,000 for a particular fiscal year, then they are required to pay their tax in advance. However, this is done in installments throughout the financial year.