ChANAKYA NATIONAL LAW UNIVERSITY

MINIMUM ALTERNATE TAX

BY

Ganesh khanna

ROLL NO. 926

4TH year, 7TH semester

To

Dr. G. P. PANDEY

(PROFESSOR AT CNLU)

On 14TH NOVEMBER , 2016

Chanakya national law university

ACKNOWLEDGEMENT

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Its a fact that any research work prepared, compiled or formulated in isolation is inexplicable
to an extent. This research work, although prepared by me, is a culmination of efforts of a lot
of people.

Firstly, I would like to thank our teacher for the subject of TAXATION LAW , DR. G. P.
PANDEY for giving such a topic for the project work which assisted me in acquiring further
knowledge in the field of TAXATION LAW. I would like to thank him for his valuable
suggestions towards the making of this project.

Thereafter, I would also like to express my gratitude towards our seniors who played a vital
role in the compilation of this project work.

I cannot ignore the contributions made by my classmates and friends towards the completion
of this project work. And I would also like to express my gratitude towards the library staff of
my college which assisted me in acquiring the sources necessary for the compilation of my
project.

Last, but not the least, I would like to thank the Almighty for obvious reasons.

-ganesh khanna

CONTENT
OBJECT OF THE STUDY

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HYPOTHESIS
RESEARCH METHODOLOGY
SOURCES OF DATA
SCOPE OF STUDY

Chapter 1

INTRODUCTION

Chapter 2

WHY MAT AND UNDERSTANDING MAT BETTER

Chapter 3

COMPUTATION OF MAT

Chapter 4

TAX CREDIT UNDER MAT

Chapter 5

CONCLUSION , CRITICISM AND SUGGESTIONS

BIBLIOGRAPHY

OBJECT OF THE STUDY

The main object of the researcher is to focus on the concept of MAT and tax liability of MAT
and to have a look on the present scenario. Other objective is also to gain knowledge as to
what are the necessary changes that should be done and amendments that are needed.

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HYPOTHESIS

The concept of Minimum Alternate Tax (MAT) has acquired tremendous importance in
recent times as it determines taxability of a company. The MAT provisions were introduced to
curb the problem of Zero Tax companies.

RESEARCH METHODOLOGY

The researcher has relied mainly on the doctrinal source of methodology and with the
available material it has relied on the data, magazines, journals, articles, text books, internet
and similar such sources.

SOURCES OF DATA

The researcher has relied both on the primary and the secondary source of data. The primary
source of data includes all the reports of international organization and other agreements and
various other such similar sources. The secondary source of data includes webpage,
newspaper, books, etc.

SCOPE OF STUDY

By doing the research on this very topic has further enhanced the knowledge about the
minimum alternate tax.

INTRODUCTION
"The substantive features of MAT have to be understood in conjunction with the accounting
standard of deferred tax." The Hindu

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The concept of Minimum Alternate Tax (MAT) was introduced in the direct tax system to
ensure that companies having large profits and declaring substantial dividends to shareholders
but who were not contributing to the Government by way of corporate tax, by taking
advantage of the various incentives and exemptions provided in the Income-tax Act, pay a
fixed percentage of book profit as minimum alternate tax.1

Section 115JB, inserted by the Finance Act, 2000 has cast a responsibility on the chartered
accountant to certify that the book profit has been computed in accordance with the
provisions of the Income-tax Act. The auditor has to further certify the income-tax payable by
the company.

Minimum Alternate Tax was proposed to bring Zero Tax companies in the tax net and this has
been abolished from April 2015 in case of FIIs. Current demand for MAT from FIIs relates to
tax payable by them for previous years and not a retrospective tax on FII. Finance Minster
has very clearly stated that it is a demand for previous years where tax was payable by FIIs as
per laws applicable in those years and not a retrospective demand.2
The MAT provisions were introduced to curb the problem of Zero Tax companies.
In 1996 when this provision was re-introduced in the form of section 115JA,
The then finance minister Mr P. Chidambram in his budget speech explaining the rationale
behind these provisions said that it was meant only for Companies preparing their profit and
loss account under the Companies Act 1956[6]. Further in the year 2000 section 115JA was
replaced by section 115JB, which is the provision of law, embodying the current MAT
regime.
Finance Bill, 2002 while amending section 115JB provided an insight into the minds of the
legislature, with regards the introduction of MAT. The explanatory notes of the bill read as
follows:
Clause 49 seeks to amend section 115JB of the Income-tax Act relating to special provision
for payment of tax by certain companies. The existing provisions of the said section provide
for levy of a minimum tax on domestic companies of an amount equal to seven and one-half
per cent of the book profit, if the tax payable on the total income chargeable to tax as per the

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2 taxguru.in/income-tax/minimum-alternate-tax-alternate-minimum-tax-provisions.html

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provisions of the Income-tax Act, 1961, is less than seven and one-half per cent of the book
profit 3

WHY MAT?

3 http://www.taxsutra.com/experts/column?sid=251

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Normally a Company is liable to pay tax on the income computed in accordance with the
provision of the Income Tax Act. For the same purpose, the profit and loss account of the
Company is prepared as per the provisions of parts II and III of Schedule VI of the
Companies Act, 1956, provided that4 -

The Accounting standards were adopted for preparing such accounts including profit and
loss account.

The methods and rates adopted for calculating the depreciation, etc. were laid before the
company at its annual general meeting (in accordance with the provisions of section 210 of
the Companies Act, 1956.)

There were large number of Companies who had book profits as per their Profit and Loss
account but were not paying any Tax because income computed as per the various provisions
of the Income Tax Act was either nil or negative or insignificant. In such cases, although the
companies showed book profits and were declaring dividends to the share holders, they were
not paying any Income Tax5.

In order to bring such Companies under the Income Tax net, Section 115JA was introduced
with effect from the assessment year 1997-98. According to this section, if the taxable income
of the company thus computed is less than 30% of its book profits, then the total income of
such assesses chargeable to tax shall be deemed to an amount equal to 30% of such book
profits.6

It was however, the Finance Act, 2000, that inserted section 115JB of the Income Tax Act,
1961, with Effect from the assessment year 2001-02 providing for the levy of Minimum
Alternate Tax (MAT) on Companies.

4 taxguru.in/income-tax/minimum-alternate-tax-alternate-minimum-tax-provisions.html

5 http://www.taxsutra.com/experts/column?sid=251

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UNDERSTANDING MAT BETTER

The Provisions of MAT have been introduced for the companies popularly known as the 'Zero
Tax Companies'. Under MAT, wherever the income tax payable on the total income of a
company, in respect of any previous year, is less than the 'prescribed percentage of its book
profits', such book profit shall be deemed to be the total income of the company and the tax
payable on such total income shall be at the 'prescribed percentage of book profits', plus
surcharge and education cess.7

The 'prescribed percentage' from the financial year 2007 is fixed at 10%. Accordingly, if the
tax payable on total income is less than 10% of book profits, then such book profits shall be
deemed to be the total income of the assessee and the tax payable under this provision shall
be 10% of book profits.

Calculating on the same lines, the probable highest rate of MAT will be 11.33% bifurcated
into 10% plus surcharge, 10% plus education cess, 2% plus Higher and Secondary Education
Cess 1%.

COMPUTATION OF MAT
7 http://psalegal.com/upload/publication/assocFile/ENewslineJuly2013.pdf

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While calculating Minimum Alternate Tax, the following steps are followed:

1. Computing Income Tax

a. Compute the total income of the company (ignoring the provision of section 115JB).

b. Compute the Income Tax payable on total income at normal rates on the profit
calculated above.

2. Calculating Book profits For the purpose of this section, book profits means the net
profit as shown in the profit and Loss account as increased by a. the amount of Income Tax
paid or payable including the provision there for; b. the amounts carried to any reserves
(other than the reserves in the case of a Government or Public Company carrying on the
business of operation of Ships, provided the reserves shall not exceed fifty percent of profits
derived from the business of operation of ships); c. the amount set aside to provisions made
for meeting liabilities, other than ascertained liabilities; d. the amount by way of provisions
for losses of the subsidiary company; e. the amount of dividends paid or proposed; f. the
amount of expenditure relatable to any income to which section 10 [other than section
10(38)] or section 10A or section 10B or section 11 or section 12 apply; g. the amount of
depreciation;8

If any amount referred to in clause (a) to (f) is debited to the profit and loss account, and as
reduced by

a. the amount withdrawn from any reserve or provision (excluding a reserve created before
1st April, 1997), if such amount is credited to the profit and loss account; 9

b. the amount of income to which any of the provisions of section 10 [other than section
10(38)] or section 10A or section 10B or section 11 or section 12 apply;

c. The amount of depreciation debited to profit and loss account (excluding the depreciation
on account of revaluation of asset);

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d. the amount withdrawn from re-evaluation reserve and credited to the profit and loss
account, to the extent it does not exceed the amount of depreciation on account of revaluation
of assets referred in (c) above;

e. the amount of loss brought forward or unabsorbed depreciation, whichever is less as per
books of account - For the purpose of this clause, i. the loss shall not include depreciation; ii.
the provisions of this clause shall not apply if the amount of loss brought forward or
unabsorbed loss is nil;

f. the amount of profits eligible under section: i. 80HHC: Deduction in respect of profits
retained for export business. ii. 80HHE: Deductions in respect of profits from export of
computer software, etc, iii. 80HHF: Deductions in respect of profits and gains from export or
transfer of film, software, etc;

g. the amount of profits of sick industrial company10.

3. Computation of Tax liability a. After computing book profits, calculate 10 per cent of book
profits (as per the provisions of section 115JB). b. If MAT liability computed as per this
section is more than the Tax liability computed in the step 1 above, then the tax payable by
the company will be equal to 10% of book profits.

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TAX CREDIT UNDER MAT

A new tax credit scheme is introduced by which MAT paid, can be carried forward for set-off
against regular tax payable during the subsequent five year period subject to certain
conditions11, 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
regular tax. Regular 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 five assessment years immediately succeeding the assessment year in
which MAT is paid. Unabsorbed MAT credit will be allowed to be accumulated subject to the
five-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. The credit allowed will not bear any interest

NON APPLICABILITY OF MAT

The provisions of this section would not apply to the following types of income: 12 Income
from the business of developing, maintaining, and operating certain infrastructure facilities
Income from units in specified zones or specified backward districts Income of certain loss-
making companies Export profits

11 http://psalegal.com/upload/publication/assocFile/ENewslineJuly2013.pdf

12 http://psalegal.com/upload/publication/assocFile/ENewslineJuly2013.pdf

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CONCLUSION, CRITICISM AND SUGGESTIONS

The concept of Minimum Alternate Tax (MAT) was introduced in the direct tax system to
ensure that companies having large profits and declaring substantial dividends to shareholders
but who were not contributing to the Government by way of corporate tax, by taking
advantage of the various incentives and exemptions provided in the Income-tax Act, pay a
fixed percentage of book profit as minimum alternate tax.

Minimum Alternate Tax was proposed to bring Zero Tax companies in the tax net and this has
been abolished from April 2015 in case of FIIs. Current demand for MAT from FIIs relates to
tax payable by them for previous years and not a retrospective tax on FII. Finance Minster
has very clearly stated that it is a demand for previous years where tax was payable by FIIs as
per laws applicable in those years and not a retrospective demand.

the Companies Act, 1956.)

There were large number of Companies who had book profits as per their Profit and Loss
account but were not paying any Tax because income computed as per the various provisions
of the Income Tax Act was either nil or negative or insignificant. In such cases, although the
companies showed book profits and were declaring dividends to the share holders, they were
not paying any Income Tax.

In order to bring such Companies under the Income Tax net, Section 115JA was introduced
with effect from the assessment year 1997-98. According to this section, if the taxable income
of the company thus computed is less than 30% of its book profits, then the total income of
such assesses chargeable to tax shall be deemed to an amount equal to 30% of such book
profits.

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BIBLIOGRAPHY

STATUTE

Income Tax Act 1961

ONLINE SOURCES

http://www.taxsutra.com/experts/column?sid=251
http://incometaxindia.gov.in/Communications/Circular/910110000000000874.htm
http://www.thehindubusinessline.com/news/education/tax-and-permanent-
establishment/article4841038.ece
http://www.fiscal-impuestos.com/files-fiscal/pe-in-india-checking-the-rule-
seguridad.pdf
http://www.floraison.in/download/inflo/MAT
https://www.bankbazaar.com/tax/minimum-alternate-tax.html
taxguru.in/income-tax/minimum-alternate-tax-alternate-minimum-tax-
provisions.html
http://psalegal.com/upload/publication/assocFile/ENewslineJuly2013.pdf

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