Minimum Alternative Tax - An Insight

A Definition - 

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.

Government's take on MAT 

  • Government formed panel to resolve tax dispute with foreign investors.
  • Finance Minister Arun Jaitley announced that a high-level committee will look into the controversial issue of payment of Minimum Alternate Tax (MAT) by FIIs. 
  • The Committee is requested to give its recommendation of the specific issues of MAT on FIIs expeditiously. 
  • Government also declared that minimum alternate tax (MAT) would not be applicable on foreign companies’ earning from capital gains on securities, royalty, fee on technical services and interest, providing a huge breather to foreign investors.

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