Introduction to Minimum

Alternate
Tax

TM
 inflo
fostering knowledge

About Floraison
floraison in French means 'flowering'.
The name reflects our objective of “ Accelerating Growth.
”
Floraison India Compliances Private Limited is a Bangalore-based business consulting
organization. As a company which provides integrated consulting services, we partner our
clients from the stage of inception to assist them in successfully commencing their operations
and further hand-hold them to run their company efficiently.

At Floraison, we strive to cultivate strong relationships with our clients by providing them with
solutions, which cater to their precise requirements. Customizability is therefore the essence of
all the services provided by us. We believe true success is not just fulfilling our clients'
requirements, but exceeding their expectations. And, to be successful, we work as an cohesive
team all the way, using the best of tools and methodologies.

Floraison is a member of:

» Confederation of India Industry
» Bangalore Chamber of Industry and Commerce
» Indo-German Chamber of Commerce

For more information on the company, Please visit us at www.floraison.in

Introduction to Introduction to Minimum Alternate Tax

 inflo
fostering knowledge

Disclaimer
This publication is a product of Floraison India Compliances Private Limited. The items contained herein are provided for general
information purposes only. Floraison strives to maintain up-to-date information from its own and other reliable sources;
however, no responsibility is accepted for any errors and/or omissions or results of any actions based upon this information,
without consulting Floraison first. Though all efforts have been made to ensure the accuracy of the content, the same should not
be construed as a statement of law or used for any legal purposes. The information is for reference purposes only and should not
be dealt with as advice.

Introduction to Introduction to Minimum Alternate Tax

 inflo
fostering knowledge

"The substantive features of MAT

have to be understood in
conjunction with the
accounting standard of
deferred tax."
The Hindu

Introduction to Introduction to Minimum Alternate Tax

 inflo
fostering knowledge

In this Issue
Introduction Page 1

Why MAT? Page 2

Understanding MAT Better Page 3

Computation of MAT Page 4

Tax Credit under MAT Page 5

Non-Applicability Of MAT Page 6

Introduction to Introduction to Minimum Alternate Tax

Introduction
The concept of Minimum Alternate Tax (MAT) was introduced in the direct
tax system to ensure that companies having large profits and declaring
substantial dividends to shareholders but who were not contributing to
the Government by way of corporate tax, by taking advantage of the
various incentives and exemptions provided in the Income-tax Act, pay a
fixed percentage of book profit as minimum alternate tax.

Section 115JB, inserted by the Finance Act, 2000 has cast a responsibility
on the chartered accountant to certify that the book profit has been
computed in accordance with the provisions of the Income-tax Act. The
auditor has to further certify the income-tax payable by the company.

Chartered Accountant
has to certify that the
book profit has been
computed in
accordance with the
provisions of the
Income-tax Act.

Introduction to Minimum Alternate Tax | Page 1

Why MAT?
Normally a Company is liable to pay tax on the income computed in
accordance with the provision of the Income Tax Act. For the same
purpose, the profit and loss account of the Company is prepared as per the
provisions of parts II and III of Schedule VI of the Companies Act, 1956,
provided that -

• The Accounting standards were adopted for preparing such accounts

including profit and loss account.
• The methods and rates adopted for calculating the depreciation, etc.
were laid before the company at its annual general meeting (in
accordance with the provisions of section 210 of the Companies Act,
1956.)
There were large number of Companies who had book profits as per their
Profit and Loss account but were not paying any Tax because income
computed as per the various provisions of the Income Tax Act was either
nil or negative or insignificant. In such cases, although the companies
showed book profits and were declaring dividends to the share holders,
they were not paying any Income Tax.

In order to bring such Companies under the Income Tax net, Section
115JA was introduced with effect from the assessment year 1997-98.
According to this section, if the taxable income of the company thus
computed is less than 30% of its book profits, then the total income of
such assesses chargeable to tax shall be deemed to an amount equal to
30% of such book profits.

It was however, the Finance Act, 2000, that inserted section 115JB of the
Income Tax Act, 1961, with Effect from the assessment year 2001-02
providing for the levy of Minimum Alternate Tax (MAT) on Companies.

Introduction to Minimum Alternate Tax | Page 2

Understanding MAT Better
The Provisions of MAT have been introduced for the companies popularly
known as the 'Zero Tax Companies'. Under MAT, wherever the income tax
payable on the total income of a company, in respect of any previous year,
is less than the 'prescribed percentage of its book profits', such book profit
shall be deemed to be the total income of the company and the tax payable
on such total income shall be at the 'prescribed percentage of book
profits', plus surcharge and education cess.

The 'prescribed percentage' from the financial year 2007 is fixed at 10%.
Accordingly, if the tax payable on total income is less than 10% of book
profits, then such book profits shall be deemed to be the total income of
the assessee and the tax payable under this provision shall be 10% of
book profits.

Calculating on the same lines, the probable highest rate of MAT will be
11.33% bifurcated into 10% plus surcharge, 10% plus education cess,
2% plus Higher and Secondary Education Cess 1%.

If the tax payable on total

income is less than 10%
of book profits, then such
book profits shall be
deemed to be the total
income of the assessee
and the tax payable under
this provision shall be
10% of book profits.

Introduction to Minimum Alternate Tax | Page 3

Computation of MAT
While calculating Minimum Alternate Tax, the following steps are followed:
1. Computing Income Tax
a. Compute the total income of the company (ignoring the provision
of section 115JB).
b. Compute the Income Tax payable on total income at normal rates
on the profit calculated above.

2. Calculating Book profits

For the purpose of this section, “book profits” means the net profit as
shown in the profit and Loss account as increased by–
a. the amount of Income Tax paid or payable including the provision
there for;
b. the amounts carried to any reserves (other than the reserves in
the case of a Government or Public Company carrying on the
business of operation of Ships, provided the reserves shall not
exceed fifty percent of profits derived from the business of
operation of ships);
c. the amount set aside to provisions made for meeting liabilities,
other than ascertained liabilities;
d. the amount by way of provisions for losses of the subsidiary
company;
e. the amount of dividends paid or proposed;
f. the amount of expenditure relatable to any income to which
section 10 [other than section 10(38)] or section 10A or section
10B or section 11 or section 12 apply;
g. the amount of depreciation;

If any amount referred to in clause (a) to (f) is debited to the profit and
loss account, and as reduced by -
a. the amount withdrawn from any reserve or provision (excluding a
reserve created before 1st April, 1997), if such amount is credited
to the profit and loss account;
b. the amount of income to which any of the provisions of section
10 [other than section 10(38)] or section 10A or section 10B or
section 11 or section 12 apply;

Introduction to Minimum Alternate Tax | Page 4

Computation of MAT (Contd.)
c. the amount of depreciation debited to profit and loss account
(excluding the depreciation on account of revaluation of asset);
d. the amount withdrawn from re-evaluation reserve and credited to the
profit and loss account, to the extent it does not exceed the amount of
depreciation on account of revaluation of assets referred in (c) above;
e. the amount of loss brought forward or unabsorbed depreciation,
whichever is less as per books of account -
For the purpose of this clause,
i. the loss shall not include depreciation;
ii. the provisions of this clause shall not apply if the amount of loss
brought forward or unabsorbed loss is nil;
f. the amount of profits eligible under section:
i. 80HHC: Deduction in respect of profits retained for export
business.
ii. 80HHE: Deductions in respect of profits from export of computer
software, etc,
iii. 80HHF: Deductions in respect of profits and gains from export or
transfer of film, software, etc;

g. the amount of profits of sick industrial company.

3. Computation of Tax liability

a. After computing book profits, calculate 10 per cent of book profits
(as per the provisions of section 115JB).
b. If MAT liability computed as per this section is more than the Tax
liability computed in the step 1 above, then the tax payable by the
company will be equal to 10% of book profits.

Introduction to Minimum Alternate Tax | Page 5

Tax Credit under MAT
A new tax credit scheme is introduced by which MAT paid, can be carried
forward for set-off against regular tax payable during the subsequent five
year period subject to certain conditions, as under:-
• When a company pays tax under MAT, the tax credit earned by it
shall be an amount, which is the difference between the amount
payable under MAT and the regular tax. Regular tax in this case
means the tax payable on the basis of normal computation of total
income of the company.
• MAT credit will be allowed carry forward facility for a period of five
assessment years immediately succeeding the assessment year
in which MAT is paid. Unabsorbed MAT credit will be allowed to be
accumulated subject to the five-year carry forward limit.
• In the assessment year when regular tax becomes payable, the
difference between the regular tax and the tax computed under
MAT for that year will be set off against the MAT credit available.
• The credit allowed will not bear any interest

Non-Applicability Of MAT
The provisions of this section would not apply to the following types of
income:
• Income from the business of developing, maintaining, and
operating certain infrastructure facilities
• Income from units in specified zones or specified backward
districts
• Income of certain loss-making companies
• Export profits

Introduction to Minimum Alternate Tax | Page 6

 Credits: Sripada M

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