Minimum Alternate Tax (MAT)
Minimum Alternate Tax (MAT) is a tax effectively introduced in India by the Finance Act of 1987, vide Section 115J of the Income Tax Act, 1961 (IT Act), to facilitate the taxation of ‘zero tax companies’ i.e., those companies which show zero or negligible income to avoid tax. Under MAT, such companies are made liable to pay to the government, by deeming a certain percentage of their book profit as taxable income.
MAT is an attempt to reduce tax avoidance; it was introduced to contain the practices followed by certain companies to avoid the payment of income tax, even though they had the “ability to pay”.
MAT is applied when the taxable income calculated as per the normal provisions in the IT Act is found to be less than 18.5% of the book profits.
MAT is levied at the rate of 18.5% of the book profits. MAT rate has been progressively increased from 7.5% in 2000 to 18.5% in 2015. In other words, the tax computed by applying 18.5% (plus surcharge and cess as applicable) on book profit is called MAT.
Normal tax rate applicable to an Indian company is 30% (plus cess and surcharge as applicable), which has been decided to be progressively reduced to 25% by 2019. A company has to pay higher of normal tax liability or liability as per MAT provisions.
MAT is applicable to all corporate entities, whether public or private. However, it does not apply to any income accruing or arising to a company from life insurance business. Nor does it apply to shipping income liable to tonnage taxation as provided in section 115V to 115VZC of the IT Act.
The corresponding tax similar to MAT, but imposed on individuals or non-corporate entities, who claim certain deductions under the IT Act (deduction under section 80H to 80RRB (except 80P), deduction under section 35AD and deduction under section 10AA), is known as Alternate Minimum Tax (AMT). The rate of AMT is also at 18.5%.
A company is liable to pay income tax on the profit earned by it (as calculated under the provisions of Companies Act, 2013) after making certain adjustments to the book profit as permissible under the IT Act. However, many companies, despite showing high profits in their books of accounts and paying substantial dividends, were observed to be paying marginal or no tax. This was done by taking advantage of various tax concessions and other incentives in a manner such as to avoid paying taxes. (eg. Depreciation allowances, exemptions etc.) MAT was thus envisaged as a mechanism for levying a minimum tax on such companies, by deeming a certain percentage of their book profits, computed under the Companies Act, as taxable income.
MAT was first introduced in India vide Section 80VVA of the IT Act through the Finance Act of 1983. Section 80VVA placed a restriction on certain deductions in the case of companies, or in other words, placed a ceiling on allowances and required companies to pay a minimum tax on at least 30% of their profits. The allowances that were unabsorbed in a particular year, due to the restriction, could be carried forward and absorbed in a later year, if there were sufficient profits.
Section 80VVA was omitted by the Finance Act, 1987 (from the assessment year 1988-89), which instead introduced section 115J in a modified form. Section 115J, as drafted in 1987, introduced a two-step process. First, the assessing authority had to calculate the income of the company. Second, the book profit had to be determined. If the income of the assessee company was less than 30% of its book profit, the total income chargeable to tax would be 30% of the book profit. The Explanation to Section 115J(1) explained the calculation of “book profits”, which were essentially the net profits shown by the company in its profit and loss account prepared under Part II and Part III of Schedule VI to the Companies Act, 1956. For the purpose of income tax, these book profits were then subject to certain adjustments, in the form of reductions and increases, in accordance with provisions of Section 115J.
Section 115J was, again made inoperative from Assessment Year 1991-92 when government widened the tax base and attempted a rationalisation.
The MAT provisions were subsequently reintroduced in 1996 by the Finance Act (No. 2) of 1996, through Section 115JA; and then by the Finance Act of 2000, which replaced Section 115JA with Section 115JB.
Section 115JB, which was amended by the Finance Act of 2015, provides that in case the tax payable on the total income of a company in respect of any previous year, computed under the Income Tax Act, is less than 18.5% of its book profit, such book profit shall be deemed to be the total income of such company. The tax payable for the relevant year for such company shall then be 18.5% of its book profit.
Minimum Alternate Tax (MAT) on Foreign Portfolio Investors (FPIs)
A controversy had recently arisen with respect to the applicability of MAT on Foreign Institutional Investors (FIIs or Foreign Portfolio Investors (FPIs) as they are known now), due to the inconsistent rulings of the Authority for Advance Rulings (AAR) on the issue.
The levy of the Minimum Alternate Tax (MAT) on FPIs in the assessment cycle on 31 March, 2015 as well as notices issued to FPIs for reopening of past assessments has led to Foreign Portfolio Investors (FPls) expressing concern over the applicability of MAT to them.
The provisions of MAT were first effectively introduced in the Finance Bill, 1987, with effect from April 1, 1989, to subject those companies to tax which distributed large amounts of dividends to their shareholders but did not pay tax as a result of tax concessions and incentives that were then available. It may be noted that at that point of time, India was a closed economy. Post liberalization of the economy in 1991, FIIs /FPIs were allowed entry into the Indian capital markets in 1993.
The applicability of MAT (originally introduced in the Income Tax Act, 1961 as section 115J and presently contained in section 115JB of the Act) has always been a keenly debated issue between the tax payers and the tax authorities. As MAT is levied as a percentage of the "book profit”, corporate taxpayers have been taking a view that Foreign Companies, which do not have a presence in India and consequently which do not maintain books in India are not required to pay MAT. The Authority for Advance Rulings [AAR] delivered some rulings in support of this contention.
For instance, the AAR in the case of The Timken Company (69 ITD 292, dated 23 July, 2010) and Praxair Pacific Limited (AAR 836 of 2009, dated 23 July 2010), held that provisions of MAT would be applicable only to those foreign companies which have permanent establishment in India. Based on these rulings, a view was being taken that MAT did not apply to foreign companies not having permanent establishment in India. The said rulings were based on the aforementioned MAT provision, which provided that only those companies which were required to draw financials as per Schedule VI to Indian Companies Act would be required to comply with MAT provisions.
However, in September 2014, the Delhi Bench of the Income-tax Appellate Tribunal [ITAT] in the case of The Bank of Tokyo-Mitsubishi UFJ Ltd v. ADIT (ITA Nos. 5364/Del/2010 and 5104/Del/2011) held that provisions of Minimum Alternate Tax (MAT) under Section 115JB of the Income-tax Act 1961 are not applicable and income has to be computed as per the provisions of Article 7(3) of the India-Japan tax treaty.
On the other hand, on 14 August 2012 the AAR in a ruling delivered in the case of Castleton Investments Ltd [AAR No. 999 of 2010, dated 14 August 2012] took a contrary view and held that MAT was payable by a foreign company having no presence in India. There was no specific exclusion for foreign companies from the MAT provisions as they were worded. It appeared that the Department of Revenue /Central Board of Direct Taxes (CBDT) had chosen to accord considerable weightage to this ruling. Based on this ruling, notices were issued to FPIs for paying MAT relating to income of earlier years.
On the issue of MAT, FPIs contend that MAT is payable on "book profit” and they do not maintain ‘books of accounts' in India; so computing 'book profit is impossible. Further, computing MAT on global book profit was not correct in law as this was in contravention of the provisions which laid down the scope of the total income of a non-resident that could be charged to tax in India. Also, those FPIs which are residents of countries having a Double Tax Avoidance Agreement (DTAA) with India are of the view that the DTAA provisions do not permit levy of tax by way of MAT.
Introduction of Section 9A to the Income Tax Act (vide Finance Act, 2015), finally clarified that having an investment fund manager in India will not render an FII/FPI to be deemed as having a place of business in India, the condition that triggers applicability of MAT. The said amendment was done to encourage the presence of a fund manager in India to bolster FII investments without the latter having to worry about onerous tax obligations such as MAT—a demand the FII fraternity has raised with successive regimes at the Centre. Government expects that this would encourage professional fund managers to locate in India, rather than operating from other venues like Singapore, Hong Kong etc., thereby bringing in more competition and professionalism in the fund/asset management business in India.
The Finance Act, 2015 further added clause (iid) to Explanation 1 to section 115JB of the Act (Explanation 1 provides the manner of computation of Book profit which is the basis for computing MAT) to exclude the amount of income from capital gains arising from transactions in securities (other than short term capital gains on which securities transaction tax is not chargeable) or the interest, royalty or fees for technical services from chargeability of MAT. This clause is inserted with prospective effect i.e., such gains accruing or arising after 1st April 2015 are proposed to be excluded from 'Book Profit'.
Hence, a Committee on Direct Tax Matters chaired by Justice A.P. Shah, was constituted to examine the issue of applicability of MAT on FPIs for the period prior to 01.04.2015. The Committee submitted its final report to the Government on 25.08.2015. The panel concluded that MAT cannot be levied on FIIs. In doing so, it observed that MAT levy was introduced to plug an abuse by book-profit-making companies declaring dividends but not paying corporate tax due to tax concessions. Such intent was evident from successive Budget speeches, circulars issued by the CBDT explaining its introduction and numerous amendments. The panel reasoned that the MAT provisions would not apply to companies which do not have a place of business in India. Since FIIs do not have a place of business in India and carry out their decision-making activities overseas (a concession was made in 2015 budget to encourage fund managers to be present in India), the panel concluded that there cannot be a case for MAT levy. The panel concluded that MAT provisions cannot override the benefits under the tax treaties. The committee has recommended amendments to the law and clarifications indicating the inapplicability of the MAT provisions to FIIs prior to April 1, 2015.
The Government has accepted the said recommendation and it has been decided to carry out appropriate amendment in the Act so as to prescribe that MAT provisions will not be applicable to FPIs not having a place of business/permanent establishment in India, for the period prior to 01.04.2015. As an immediate relief (pending amendment to law), the Central Board of Direct Taxes has issued instructions to its officers to keep the proceedings in abeyance.
- Tutorial material of Income Tax Department on MAT
- Report of the Committee on Direct Matters on Applicability of Minimum Alternate Tax (MAT) on FIIs / FPIs for the period prior to 01.04.2015 submitted to the Government on 25 August 2015
- To see the various provisions of the Finance Act and IT Act click here.