There are various companies, which earn substantial amount of profit, quite enough to be able to declare dividend to their shareholders. However, they avail a number of deductions, exemptions or incentives, due to which their net taxable profit comes out to be an insignificant amount or NIL.
Though these companies satisfy all the requisite conditions for availing the deductions/ incentives/ exemptions, which are allowed by the Income Tax Act, however, the government had never intentioned to provide the benefit of these relaxations to such entities. This brings in the concept of MAT under section 115JB of the Income Tax Act.
PROVISION AND APPLICABILITY
As per the provisions of MAT, in case the income tax calculated as per the normal provisions of the Income Tax Act by any company ( MAT applies only for corporate assesses), is less than 18.5% of tax on Book Profit* of the Company, then such ‘Book profit’ (BP) shall be considered as its total income, and thus, the company shall be required to pay 18.5% of such total income as minimum amount of tax.
In other words, every company is required to pay higher of the following:For computing the book profit, the net profit shall be increased or reduced by the following, in case such amounts have been debited or credited in the Profit & Loss Account (respectively) of the Company- Increase: Income Tax paid or payable (as per normal provisions of the Income Tax paid) Transfer made to any reserve Dividend proposed or paid Provision for loss of subsidiary Company Depreciation (including on revalued assets) Amount of deferred Tax or its provision made Provision for unascertained liability Amount of expenditure relatable to any exempt income* (u/s. 10,11,12- excluding section 10(38)) *As, expense incurred towards any exempt income shall not be allowed under section 14A if the Act.
Reduce: Amount withdrawn from any reserve or provisions Income u/s. 10,11,12 (except 10(38)) Amount withdrawn from revaluation reserve Amount of depreciation debited to profit & loss account (excluding claim on revalued assets) Amount of brought forward loss (excluding depreciation) or unabsorbed depreciation- whichever is less. Deferred Tax (if any) In case the assessee is liable to pay tax as per the MAT provisions, then the total tax shall be: Note*- Surcharge is applicable at the following rates: Company Rate of Surcharge Criteria Domestic 7% Total Income>1Cr.<10Cr. 12% Total Income>10Cr. Foreign 2% Total Income>1Cr.<10Cr 5% Total Income>10Cr. MAT CREDIT Well, these provisions might seem unfair to the entities, which have to pay tax, higher than their assessed tax liability due to MAT.
Thus, we have a provision of MAT credit, under which, the amount of tax paid under MAT provisions, which is in excess of the entity’s assessed tax liability as per the normal provisions of Income Tax Act, shall be available as MAT credit for next 10 assessment years (i.e. succeeding the assessment year in which credit became allowable). Illustration: Let us suppose that the total taxable income of X Ltd., as per the Income Tax Act is Rs. 50,00,000 and book profit as per MAT is Rs. 75,00,000.
SET OFF OF MAT CREDIT
As mentioned above, the available MAT credit shall be allowed to be set off against any future tax liability up to next 10 assessment years (AY). However, only such credit is allowed to be set off against the tax payable on total income in an AY, in which the tax is computed as per the normal provisions of the Income Tax Act, to the extent such tax exceeds the tax as per the provisions of MAT.
Even though the tax liability of the Company is Rs. 200 and the available credit is Rs. 300, however, the Company cannot utilize Rs. 200 out of the available 300, as MAT requires companies to pay a minimum of 18.5% of their BP. So the Company will have to pay at least Rs. 90 and can utilize the credit, only up to the extent of amount payable in excess of MAT liability, i.e. 200-90= 110.
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