Understanding Minimum Alternate Tax (MAT): A Guide for Businesses

When profits soar, tax liabilities follow. But what happens when companies show big profits in their books but pay little or no tax? That’s where the Minimum Alternate Tax (MAT) steps in.

What is Minimum Alternate Tax (MAT)?

The Minimum Alternate Tax (MAT) is a provision under the Indian Income Tax Act, introduced to ensure that companies that report high profits and distribute dividends, but reduce their tax liability through exemptions and deductions, still contribute their fair share to the government.

In simple terms: Even if a company is paying little or no income tax due to legal tax breaks, it still has to pay a minimum amount of tax—this is the MAT.

Legal Framework

• Section 115JB of the Income Tax Act governs MAT.

• Applies to companies (both domestic and foreign) having a presence in India.

• MAT is calculated on the basis of book profit, not taxable income.

How is MAT Calculated?

Here’s the basic formula:

MAT = 15% of Book Profit + applicable surcharge and cess

Book Profit refers to the net profit as shown in the company’s profit & loss account, prepared in accordance with the Companies Act, with certain adjustments as prescribed.

Example:

If a company’s book profit is ₹10 crore:

• MAT = 15% of ₹10 crore = ₹1.5 crore

• Add cess and surcharge as applicable

So, even if the normal tax liability is lower due to deductions, the company will still have to pay ₹1.5 crore (plus cess/surcharge).

MAT Credit: You Can Claim it Back

The good news is: MAT isn’t a sunk cost. If a company pays MAT in a particular year and in future years its normal tax liability exceeds MAT, it can claim MAT credit.

• MAT credit can be carried forward for 15 assessment years.

• It can be set off against regular tax liability, but not against MAT in future years.

Who is Exempt from MAT?

Some entities are exempt from MAT, including:

• Companies in Special Economic Zones (SEZs) (for specific periods)

• Certain foreign companies whose income is taxed on a presumptive basis

• Life insurance companies under Section 115B.

MAT vs AMT: What’s the Difference?

While MAT applies to companies, Alternative Minimum Tax (AMT) applies to non-corporate taxpayers (like LLPs, partnerships, and individuals claiming certain deductions)

Final Thoughts

Minimum Alternate Tax is a safeguard to ensure equity in the tax system. While it may seem like a hurdle for companies enjoying deductions, it helps maintain a balanced and fair contribution to national revenue.

If you're a business owner or CFO, understanding MAT can help in tax planning, compliance, and optimizing your overall tax strategy.