Minimum Alternate Tax (MAT) – Minimum Alternate Tax Meaning, MAT Debit, Credit & Calculation

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What is the Minimum Alternate Tax?

Minimum Alternate Tax or MAT is an advance tax imposed on companies. The government of India has launched this Tax under Section 115JB of the Income Tax Act, 1961. MAT makes the companies pay the minimum tax to the government under this section. It is only applicable to companies such as HUFs, partnership firms, etc but not to any individual.

The main purpose of introducing MAT Tax is to collect the tax from those companies that make huge profits and distribute a dividend to shareholders and partners but somehow exclude themselves from paying Income Tax. It is a minimum tax on their huge profits that goes straight to the Income Tax Department. The government has set a MAT Tax Rate on such companies and they only have to pay 15% of their profits to the government under this section, no matter how much profit they make.

Minimum Alternate Tax means a minimum tax that has been debited from the profit of large organization and partnership firms which make huge profits and don’t pay any tax to the government on their income. MAT is a method of keeping track of the income of such companies in the name of book profit and holding them accountable for paying tax. Not every company has to pay MAT. If the tax paid by the company is less than 18.50% of its book profit. This Provision is not applicable in the case of loss only if losses don’t include the cost of depreciation.

How To Calculate MAT?

As we know now, according to the Income Tax Act 1961, section 115JB. MAT is applicable only if the book profit of a company is more than its normal taxable income. Book Profit is the net profit of the company after every expense and liability paid in the profit and loss account of the subsequent year. The MAT tax rate is now 15% instead of 18.5 since AY 2019-2020 plus surcharge and cess.

Amount Debited to The Profit and Loss Account

  1. Payable or paid Income Tax
  2. Reserve transfer
  3. Paid or proposed dividend
  4. Provisions for deferred tax
  5. Depreciation and revaluation of assets
  6. Provisions for bad debts, etc.

The Amount Credited to The Profit and Loss Account

  1. Amount withdrawn from reserves
  2. Amount withdrawn from the revaluation of assets
  3. Amount credited from deferred tax provisions
  4. Amount credited from the income provisions according to section 10,11and 12 excluding 10AA & 10(38).
  5. Debited depreciation amount in the revaluation of assets and provisions
  6. Loss or depreciation brought forward

Now, you already know the MAT tax rate but how will you know when and where it is applicable. Let us explain to you with the help of an example. 

A company name XYZ ltd. Is paying the tax as per normal Income tax rate 22% on 20 lakh that will be 4,40,000 plus surcharge and cess. Whereas the company’s book profit is 50 lakh. 

As per section 115JB, Company is supposed to pay the MAT tax which is 15 % of the book profit which is 7,50,000 plus surcharge and cess.

Now, just because the MAT is higher than the normal tax payable, the company is liable to pay the 7.5 lakh and not 4.4 lakh plus surcharge and cess. In case the MAT amount is less than the normal tax value then the company will continue to pay the normal tax rate for that accounting year.

For more information in detail and for learning how to calculate MAT and book profit for your companies every accounting year you can visit the Marg Compusoft website and take the help of our accounting experts. You can even buy our accounting software that will not just make the calculations easy but will save your time and money in an organized and systematic way.

What Is MAT Credit?

As We have discussed above if the normal taxable amount and MAT tax Are different and the MAT tax amount is greater than the normal tax liability then the company should pay the MAT and the difference between the MAT and normal Income Tax payable is called MAT credit.

MAT Credit is calculated by deducting the normal taxable amount from minimum tax and whatever the difference comes is considered as MAT Credit. When MAT credit is found in any accounting year, it automatically carried forward to the next 15 following accounting years. If the extra tax is paid in a certain accounting year then the amount shall credit from the succeeding accounting year. 

If the normal tax liability is greater than the minimum tax then MAT Credit should be adjusted in that and following accounting years under the normal provisions of the act. The adjusted amount should be allowed to reduce the difference between the normal tax payable on income and tax payable as minimum alternate tax under section 115JB.

Difference Between MAT And AMT

Minimum Alternate Tax meaning MAT and Alternate Minimum Tax means AMT. Initially, MAT is only used to apply to companies that used to make more profits than income and divide it between its shareholders. Then this kind of tax slowly starts applying to other taxpayers too as a form of AMT Tax rate. 

AMT Credit is a tax in addition to your regular income tax. It is a separate tax payable which is applicable when two types of adjustment have been made on regular tax. These two types of adjustments are deferral and exclusion items. The tax credit created by deferral items is known as AMT Credit. 

If their AMT is not exactly the exclusion, they don’t need to pay AMT. For wedded couples recording mutually, the AMT tax needs to surpass $191,500 and the exclusion figure is $111,700 ($113,400 in 2020). It’s imperative to note, however, that citizens with AMTI over a specific limit don’t meet all requirements for the AMT exclusion.

In 2020, the AMT tax rate is of two types which are 26 and 28 percent if the income is $197,900 or above respectively. If you want to know whether you are eligible to pay the AMT tax rate then you can fill out the AMT form 6251. If the tax calculated under AMT form 6251 is greater than the regular tax liability then you must pay the difference commonly known as AMT Credit.

We know that calculating MAT and AMT is quite difficult due to certain similarities but Marg Compusoft can help you to deal with such tax issues with the help of their accounting software and expert accountants. Marg Compusoft is a leading accounting expert and their accounting software is updated and they can do the calculations for several years without going through different files because they store their data in the cloud.

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