All you wanted to know about MAT

Foreign investors have been crying foul, in recent weeks, over the ₹40,000 crore tax demand — for Minimum Alternate Tax (MAT) — payable by them for previous years.

The Finance Minister has been vehement in support of the tax department, stating that asking for what is legitimately due to the government does not amount to tax terrorism.

Whether foreign investors, investing in our country under the aegis of double tax treaties, are liable to pay MAT is open to debate.

But it is not just the foreign investors who are impacted by such demands. Domestic firms too have seen their tax payments shoot higher thanks to the levy of MAT.

The MAT is the means through which the government makes companies that do not pay any tax — despite showing hefty book profits and paying handsome dividends to their shareholders — cough up some money to the exchequer.

How were the companies formerly getting away with paying almost no tax? Well, income tax law allows companies to claim certain exemptions, deduct certain expenses and make various provisions to arrive at the taxable income. As a result of these, the taxable profit can be zero despite a substantial net profit on the books.

But after the introduction of the MAT in 1996, the taxable profit has to be adjusted for these deductions, transfers to reserves, depreciation, deferred tax and so on to arrive at the book profit.

MAT is then calculated at 18.5 per cent of the book profit plus surcharge and cess. The higher of the two amounts — tax computed on the income of the company at the applicable income tax rate or the MAT — is to be paid by the company.

All companies in India, whether domestic or foreign, fall under this provision. MAT was later extended to cover non-corporate entities as well.

This tax is called the Alternate Minimum Tax (AMT). It can however be demanded only from those entities who have claimed specific deductions such as royalty received for patents and capital expenditure prior to commencement of business.

The IT department considers MAT to be an important tool with which it can prevent tax avoidance. For instance it is common for companies to set up shell companies as subsidiaries and show losses in such companies to reduce taxable profits. For the MAT computation, losses in subsidiaries need to be added back. Revaluation of assets is another common method for reducing taxable profits. This too is adjusted while calculating MAT.

Why should I care?

Well if the government has enough revenue in its coffers, it means it can invest in public utilities and other infrastructure that make life better for you. If you own a small business that has claimed tax benefits for initial investment or for setting up business in export processing zone and so on, you will have to pay the AMT, even if your taxable profit is low.

The Finance Minister, in the recent Union Budget, has indicated that exemptions are going to be phased out gradually while the corporate tax rate moves lower. This means that the days of MAT terrorism are numbered.

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