Companies find various loop-holes to avoid
paying income tax by using several exemptions. MAT is a way of making companies pay a
minimum amount of tax
Albert Einstein once said that the hardest
thing in the world to understand is income tax. The statement rings true as tax laws are
quite complicated and requires a great deal of time and effort to understand them. Most of
us get by with a basic understanding of tax matters. Buy help is not at hand.
Direct tax in lay terms is a tax on income
that you have to pay, it cannot be shifted to others. Some of its forms include income
tax, wealth tax, etc. Direct taxes are directly levied on individuals, corporations and
organisations and collected by way of income tax returns to be filed each year.
An indirect tax is collected by an
intermediary (such as a retail store) from the person who bears the ultimate economic
burden of the tax (such as the customer). Indirect taxes include sales tax, service tax,
value-added tax, commodity transaction tax and securities transaction tax among others.
One such indirect tax is the minimum
alternate tax (MAT). Going forward, we will explain what MAT is, the reasons for its
introduction, and who is liable to pay the tax.
Normally, a company is liable to pay tax on
the income computed in accordance with the provisions of the Income-Tax Act, but the
profit and loss account of the company is prepared as per provisions of the Companies Act.
In the past, a large number of companies
showed book profits on their profit and loss account and at the same time distributed huge
dividends. However, these companies didn’t pay any tax to the government as they
reported either nil or negative income under provisions of the Income-Tax Act.
These companies were showing book profits
and declaring dividends to their shareholders but were not paying any tax. These companies
are popularly known as ‘zero tax’ companies.
The Indian Income-Tax Act allows a large
number of exemptions from total income. Besides exemptions, there are several deductions
permitted from the gross total income. Further, depreciation allowable under the
Income-Tax Act, is not the same as required under the Companies Act. The latter provides a
lower rate viz-a-viz the I-T Act which computes a higher rate of depreciation.
The result of such exemptions, deductions,
and other incentives under the Income-Tax Act in the form of liberal rates of depreciation
is the emergence of zero tax companies, which in spite of having high book profit are able
to reduce their taxable income to nil.
In order to bring such companies under the
I-T net, Section 115JA was introduced from assessment year 1997-98. Now, all companies
having book profits under the Companies Act shall have to pay a minimum alternate tax at
MAT is a way of making companies pay
minimum amount of tax. It is applicable to all companies except those engaged in
infrastructure and power sectors. Income arising from free trade zones, charitable
activities, investments by venture capital companies are also excluded from the purview of
MAT. However, foreign companies with income sources in India are liable under MAT.
For example, book profit before
depreciation of a company is Rs. 7 lakh. After claiming depreciation and other exemptions,
gross taxable income comes to Rs. 4 lakh. The income tax applicable Rs. 1.2 lakh at a rate
of 30%. However, MAT would be Rs. 1.29 lakh (Rs. 7 lakh at 18.5%).
The MAT paid can be carried forward and
set-off (adjustment) against regular tax payable during the subsequent five-year period
subject to certain conditions.