INTRODUCTION
The concept of Minimum Alternate Tax (MAT) was introduced to impose a condition on zero tax companies to pay minimum tax. This idea of minimum tax has undergone various changes through amendments since its inception because of the complexities and difficulties attached to it.
The underlined idea of legislature behind addition of the provision of MAT is that every entity pays minimum tax and contributes to the revenue. However, MAT is a tax applicable on corporate entities only and does not apply to non-corporate entities. It ensures that companies who are availing deductions under the Income Tax Act, 1961 (hereinafter “IT Act”) do not evade their tax liability and pay the minimum tax.
This blog discusses the concept of MAT, the objectives behind bringing this provision. In addition to that, it also gives a brief idea of MAT credit and carry forward mechanism and thereafter it looks at the pitfalls of MAT regime with a few suggestions at the end.
HISTORY OF MINIMUM ALTERNATIVE TAX
The problem of zero tax companies was first addressed in the year 1983 and Section 80 VVA was added to the IT Act that stipulated ‘Restriction on Certain Deductions in case of Companies’. The introduction of Section 80VVA of the IT Act was with a mandate that aggregate amount of deductions shall not exceed 70% of the pre-incentive total income.
The ceiling was imposed upon the companies so that they do not avail the tax incentives beyond that limit in a given financial year. However, this provision proved to be unsuccessful for the Income Tax Department as the companies kept evading the tax liabilities under the garb of tax deductions applicable to them under the IT Act.
In the year 1987, Section 80 VVA of the IT Act was substituted by Section 115J which stipulated ‘Special Provisions relating to Certain Companies’. Section 115J of the IT Act brought the new calculation method and required the companies to calculate tax on book profits (net profits as shown in the profit and loss account for relevant previous year).
After this change, companies were required to maintain two sets of accounts, one for calculating tax income under the general provisions of the IT Act and second for calculation of the book profits under the Companies Act.
But this provision was repealed in the year 1990 and was later re-introduced in the year 1997 by inserting Section 115JA to the IT Act. Section 115JA of the IT Act brought the concept of MAT credit. Lastly, a new Section 115JB was introduced in the year 2000, which is the current provision applicable to all companies.
OBJECTIVES OF MINIMUM ALTERNATIVE TAX
The provisions of MAT were introduced to the IT Act with an aim to tax the “zero tax” companies. Zero tax companies are those companies that make huge book profits and give substantial dividends to their shareholders but do not pay tax under the IT Act because of the exemptions, deductions and incentives mentioned therein.
Earlier, companies used to take advantage of given exemptions under the IT Act in order to avoid tax liability and by showing insignificant taxable income even after making huge profits. With an aim to curb such practices followed by the companies, the Government came up with the canon of MAT.
This concept of MAT was introduced with the purpose of preventing the huge profit making companies from evading taxes under the garb of deductions and incentives and to ensure that such companies pay the minimum tax even after all the calculated deductions, exemptions and incentives applicable on them under the IT Act.
Currently, all companies are required to pay the MAT as a corporate tax at least equal to higher to the normal tax liability in accordance with Section 115JB of the IT Act.
APPLICABILITY AND NON APPLICABILITY OF MINIMUM ALTERNATIVE TAX
Applicability:
The provisions of MAT are applicable to all companies including public companies, private companies, Indian companies and foreign companies etc., if the income tax payable by the said company is less than the 15% of the book profit including cess and surcharge.
Exemption Provisions:
- As per explanation 4A to Section 115JB of the IT Act, the foreign companies where its total income comprises solely of profits and and gains from business mentioned in Section 44B, Section BB, Section 44 BBA, or Section 44 BBB of the IT Act and such income has been offered to tax as per rates specified in those sections.
- If the assessee company belongs from a specific territory or country with which the Government of India has the agreement as per Section 90 (1) of the IT Act.
- If the assessee company does not have a permanent establishment in the country as agreed to the Central Government as per Section 90 A(1) of the IT Act.
- If the assessee company does not have an agreement with the Government of India as per Section 90 (1) of the IT Act and does not require to seek registration under any law for the time being in force relating to companies.
- As per sub-section 6 of Section 115JB, certain people whose income accrued on or arise after the 1st April 2005, from any business carried on or services rendered by entrepreneur or a developer, in a unit of Special or Economic Zone.
MINIMUM ALTERNATE TAX CREDIT AND CARRY FORWARD MECHANISM
MAT Credit can be understood as the difference between the tax amount calculated under the MAT provisions and the tax calculated under the general provisions of the IT Act i.e. Normal tax liability. MAT credit can be used by the companies as they are allowed to carry it forward and set off the available credit against the income tax liability in an assessment year in which they are to be assessed as per the provisions of the IT Act.
However, such credit can be availed to the extent of such tax payable over and above the book profits in the given assessment year. Furthermore, the available MAT credit is allowed to be carried forward and set off for 15 assessment years immediately following the assessment year in which the tax credit was first calculated.
The Carry Forward Mechanism of MAT Credit (Section 15JAA) was first introduced in the IT Act in the year 1996 and it works as follows:
- The company has to calculate the tax payable for a financial year under MAT provisions and it is then required to be compared with tax payable on the regular basis under the general provisions of the IT Act.
- If the tax payable by the company on MAT is higher than the regular tax that it would have paid in the assessment year, the company has to pay the tax compute under the provisions of MAT.
- Companies are allowed to carry forward the available MAT credit for the period of 15 years.
- In case a company pays a regular tax not under the provisions of MAT, then it can set off the MAT Credit from previous year against the income tax liability in the assessment year, however, it can utilize this unabsorbed MAT credit up to a period of 15 years only.
- There is no interest levied on the MAT credit.
The carry forward mechanism of MAT credit ensures that company always pay a minimum tax and does not evade from tax liability even in the year it sets off the credit against the normal tax liability. However, the carry forward period allowed for MAT credit has been increased to 15 years in the financial year 2017-18 from the earlier specified period of 10 years.
CHALLENGES WITH RESPECT TO MAT
Although, the intention behind introduction of MAT Credit and Carry Forward Mechanism was to provide the flexibility to the companies, however, these features of MAT are bit complicated. Following are the certain challenges faced by the taxpayers:
- The provisions of MAT mandate the calculation of tax on the basis of “book profit” only, which results into the conceptual complexities. Such calculations make the MAT regime even more complicated resulting in high cost of compliance and administration for companies.
- Since the provisions of the MAT require the companies to calculate tax liability under MAT as well as general provisions of the IT Act, this increases the costs for record-keeping and compliance for the company.
- MAT provisions are applicable to all companies and the companies that pay MAT are also liable to pay advance tax which prompts the company to maintain two separate records, contravention of which results in penalties. This discourages the companies to show actual profits made by them by adopting different accounting policies which in turn also affects the other stakeholders of the company because of the lowered profits.
Company cannot utilize their MAT credit for setting off the regular income tax liability because of the plethora of restrictions in regards to when and to what extent these unabsorbed credit can be utilized by the companies and because of which their credit remains accumulated and unutilised. This further discourages the companies to show the actual accounts of the companies.
AMLEGALS REMARKS
There is no ambiguity in stating that computation procedure under MAT is complicated and poses challenges for the companies in complying with the same. In 2017, a report was submitted by the Comptroller and Auditor General of India which revealed that existing provisions of the MAT are quite ineffective. Most of the companies are not able to utilize their MAT credit because of the inherent complexities of Section 115JB of the IT Act.
The complexities relating to the computation of tax liability under the MAT provisions can be reduced and the entire procedure can be made more simple and clear. Companies are required to maintain two separate set of records thereby increasing the book keeping cost for such companies. In order to solve this problem, computation process under MAT provisions can be made easier or deductions under the IT Act can be simplified. The tax base for companies falling under the category of zero companies can be increased instead of imposing different taxes on the said companies to ease out the process.
Even after two decades, the provisions of the MAT have not been complied with and enforced properly. The provision requires more deliberation from the concerned authorities so that extant lacunae can be filled and this provision can be implemented properly.
-Team AMLEGALS, assisted by Ms. Damini Chouhan (Intern)
For any queries or feedback, please feel free to get in touch with chaitali.sadayet@amlegals.com or aditi.tiwari@amlegals.com.
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