MAT is a tax mechanism intended to guarantee that businesses, particularly those who make significant profits, pay the government a minimum amount of tax.
It was implemented in India in 1987 as a component of the Income Tax Act, 1961, and is applicable to all businesses operating in India or from other countries.
The Finance Act, 1987 introduced MAT in the form of a tax on book profits in Section 115J of Income Tax Act.
This tax was implemented to make sure that no person with a significant amount of income would be able to avoid paying taxes due to any exemptions.
In an effort to support the Make in India drive, the government has passed the Taxation Laws (Amendment) Ordinance, 2019, which proposes significant corporate tax relief to support domestic enterprises.
MAT has been lowered from FY 2019-20 to 15% from 18.5% for businesses that continue to get exemptions and incentives.
Corporate tax rate are 22% which were previously 25.17% without exemptions, inclusive of surcharge and cess. While for new manufacturing companies, tax rate has been brought down to 15% (Effective Tax Rate 17.01% inclusive of Surcharge and Cess).
MAT: Implementation Issues
Calculating MAT:
- One of the key problems is doing MAT calculations correctly. The formula used to determine MAT is intricate and includes a number of modifications and deductions.
- Companies find it challenging to determine their MAT obligation precisely as a result.
MAT Credit:
- Any business that opts to pay minimum alternate tax (MAT) instead of regular tax will have the extra tax paid returned back to it as a tax.
- However, there have been instances where businesses were unable to utilise their MAT credit for a variety of factors, including inadequate profits or unused depreciation.
- As a result, unused MAT credit has accumulated, which is causing the companies’ cash flow issues.
Impact on overseas Investors:
- Because MAT is applicable to foreign companies as well, foreign investors have expressed worry.
- Due to MAT and the tax regulations of their home country, there have been occasions where overseas corporations have been subjected to double taxation.
Impact on Small Businesses:
- The MAT was originally created to go after larger businesses that were avoiding paying taxes because of numerous exemptions and deductions.
- Small businesses with poor profit margins, however, have also been impacted by MAT because the tax is based on book profits, which does not accurately reflect actual cash profits.
MAT: Reforms
Simplify MAT Calculation:
- The MAT calculation methodology is complicated and includes a number of modifications and deductions.
- Simplifying the calculation could ease the burden of compliance and make it simpler for businesses to determine their MAT liability.
Review MAT Rates:
- Even though MAT has been lowered from 18.5 percent to 15 percent for businesses that continue to get exemptions and incentives.
- But the government may yet take some additional measures to make payment more bearable and to lighten the tax burden.
Provide Relief for amassed MAT Credit:
- Businesses that have amassed MAT credit as a result of unused losses or depreciation should be permitted to do so for a longer period of time or should offer relief in the form of a reimbursement.
- This might make it easier for these businesses to manage their cash flow and provide them more flexibility when using their MAT credit.
Align MAT with Accounting Standards:
- At the moment, MAT is calculated based on a company’s book profits.
- The difference between book and taxable profits may be smaller if the MAT computation is in line with the company’s accounting standards, which would lower the MAT liability.
- And a lot of smaller scale business would be benefitted.
Simplify MAT Compliance:
- Companies may find it time-consuming and expensive to comply with the additional paperwork and reporting obligations associated with MAT.
- The administrative load on businesses could be decreased and it might be simpler for them to comply with the tax by simplifying the MAT compliance criteria.
MAT: Recommendations of Shah Committee
Minimum Alternate Tax (MAT) rules were to be reviewed by the Shah Committee, which was established by the Indian government. The committee made the recommendations listed below in its report, which was submitted in August 2019:
- Raising the MAT barrier: The committee suggested raising the MAT threshold from the existing Rs. 10 crore to Rs. 25 crore. As a result, businesses with annual revenues under Rs. 25 crore will not be required to pay MAT.
- MAT credit carryover: The committee suggested extending the time frame for MAT credit carryover from the existing 10 years to 15 years. Companies who have made losses but are unable to offset their MAT credit against their tax bills would benefit from this.
- SEZ unit exemptions: The committee suggested that as SEZ units are already subject to a minimal alternate tax under the SEZ Act, they be free from MAT.
- Exemption for international companies: The committee suggested that foreign businesses that have a permanent establishment in India and are subject to taxation under the Double Taxation Avoidance Agreement (DTAA) be exempt from MAT.
- Elimination of MAT on book profits: The committee advocated completely getting rid of MAT on book profits because it leaves companies with more work to do in terms of complying with regulations.
