In India, businesses pay tax on the profits they earn. However, for a long time, many companies managed to pay little or no tax even though they showed big profits to their shareholders. They did this by using tax incentives, deductions, and exemptions available under the law. Such companies came to be known as “zero-tax companies.” This created an imbalance; at one point, the ordinary taxpayers were paying their share honestly, but many large companies with high profits were contributing almost nothing. To fix this gap, the government introduced the Minimum Alternate Tax (MAT).
The idea behind MAT is simple: every profitable company should pay at least a minimum amount of tax, even if it enjoys tax benefits.
How MAT Came into Existence?
The concept of MAT was introduced in 1987 by the government of India when it inserted Section 115J of the Income Tax Act, 1961. Its purpose was to make sure companies with high book profits don’t completely avoid taxes.
Later, the rules were revised:
- In 1991, MAT was introduced under Section 115JA with a rate of 30% of book profits.
- In 2000, the law was shifted to Section 115JB, which continues to govern MAT today with improvements from time to time.
What is Minimum Alternate Tax (MAT)?
MAT is like a backup tax system.
- Normally, companies calculate tax as per the income tax rules.
- But if this tax comes out to be less than 15% of their book profits, they have to pay MAT.
- Book profit means the profit a company shows in its financial statements, with some adjustments as per Section 115JB.
MAT ensures that every company pays some tax, no matter how many exemptions or deductions it claims.
Who Has to Pay MAT?
MAT applies to:
- All Indian companies (private, public, listed, unlisted).
- Foreign companies if they earn income in India and do not get relief under tax treaties (DTAAs).
However, some categories are exempt (explained later).
Current MAT Rate
The present MAT rate is 15% of book profit (plus surcharge and cess).
How is MAT calculated?
- Start with Net Profit – Take the profit as per the company’s profit and loss account (prepared under the Companies Act).
- Make Adjustments – Add back items like income tax, deferred tax, and provisions for liabilities. Deduct items like exempt income, withdrawals from reserves, etc.
- Get Book Profit – This adjusted profit is called “Book Profit.”
- Apply MAT Rate – MAT = 15% of Book Profit (plus surcharge and cess).
- Compare with Normal Tax – If normal income tax liability is higher, MAT is ignored. If the normal tax is lower, MAT must be paid.
Example
- Profit as per books = ₹10 crore
- Book profit after adjustments = ₹8 crore
- Normal tax liability = ₹50 lakh
- MAT = 15% of ₹8 crore = ₹1.2 crore
Since normal tax (₹50 lakh) < MAT (₹1.2 crore), the company will pay ₹1.2 crore.
MAT Credit – relief for companies
One important feature of MAT is MAT Credit.
- When a company pays MAT, the extra amount (the difference between MAT and normal tax) can be carried forward.
- This credit can be used later when the company’s normal tax liability becomes higher than MAT.
- The credit can be carried forward for 15 years.
This ensures that companies are not permanently at a loss when they pay MAT.
Exemptions from MAT
Certain companies and income categories are not covered by MAT. These include:
- Foreign companies that are taxed at special rates under tax treaties (DTAAs).
- Companies in International Financial Services Centres (IFSCs), if their income is earned in foreign currency.
- Earlier SEZ units had full exemption from MAT, but since 2011, they have also been covered.
MAT Vs Normal Corporate Tax
| Normal Corporate Tax | MAT | |
| Base of Tax | Income calculated as per the Income Tax Act | Book profit after adjustments |
| Tax Rate | 22%, 25%, or 30% (depending on company type) | 15% (plus surcharge & cess) |
| Carry Forward | Not available | MAT credit available for 15 years |
| Purpose | Tax on taxable income | Ensure minimum tax payment |
Effect of MAT on Different Stakeholders
- Domestic Companies – They cannot avoid taxes completely by claiming exemptions. MAT ensures they pay at least a minimum tax.
- Foreign Companies – Initially, MAT created confusion for foreign investors. Later, the government clarified exemptions under DTAA to avoid discouraging investment.
- SEZ Units and Startups – MAT has reduced the benefit of tax holidays, making such incentives less attractive.
- Government – MAT has helped maintain steady tax revenue and reduce misuse of exemptions.
Recent Updates
- MAT rate cut from 18.5% to 15% in 2019.
- MAT is not applicable to companies in IFSC if their income is earned in foreign currency.
- With the new corporate tax regime (22% for domestic companies and 15% for new manufacturing companies), MAT still exists but applies at a lower rate.
Criticism of MAT
Though MAT serves an important purpose, it is not free from criticism:
- Takes away incentives – Many businesses argue that MAT reduces the benefit of tax holidays and exemptions.
- Complex rules – Adjusting book profits under Section 115JB makes compliance complicated.
- SEZ impact – The attractiveness of SEZs went down after MAT was applied to them.
- Foreign investor concerns – At one stage, foreign companies feared double taxation because of MAT, though this has been resolved to an extent.
Conclusion
Minimum Alternate Tax is like a safety net in India’s tax system. It ensures that every company, whether Indian or foreign, pays some amount of tax if it is profitable. It has successfully reduced the problem of “zero-tax companies” and strengthened government revenues. As India continues to reform its tax system to attract global investment, the future of MAT will likely be shaped by a balance between two needs: collecting fair tax revenue and keeping businesses competitive.
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