MinimumAlternate Tax

“MINIMUM ALTERNATE TAX”

SUBMITTED TOWARDS THE FULFILMENT OF THE COURSE –

TAXATION LAWS – I (DIRECT TAX)

Submitted to: Submitted by:

Dr. Ganesh P. Pandey Shadab Samar Gous
7th Semester
1373

CHANAKYA NATIONAL LAW UNIVERSITY

NYAYA NAGAR, MITHAPUR PATNA 800001
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 MinimumAlternate Tax

TABLE OF CONTENTS

S.NO. PARTICULARS PAGE NO.

1. ACKNOWLEDGEMENT 3

2. INTRODUCTION 4

3. OBJECTIVE 5

4. RESEARCH METHODOLOGY 5

5. SOURCES OF DATA 5

6. BACKGROUND ON MINIMUM ALTERNATE TAX 6

7. MINIMUM ALTERNATE TAX ON FOREIGN 8

INVESTORS

8. APPLICATION OF MINIMUM ALTERNATE TAX 11

10. CONCLUSION 13

11. BIBLIOGRAPHY 15

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ACKNOWLEDGEMENT

I would sincerely like to thank our faculty of Law of Taxation - I, Dr. G.P. Pandey, for his
valuable guidance and support in understanding the research topic and moving ahead with the
research work. It would have been difficult to make this project but for his help and able
guidance.
I would also like to thank all those people who helped me in carrying out the project work with
ease and diligence. They were of great help in successful completion of this project. I would like
to thank my friends who assisted me in the research process and cherished me with their useful
suggestions.

Any suggestions for further improvement of the project are greatly acknowledged.

-Shadab Samar Gous

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 MinimumAlternate Tax

INTRODUCTION
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 profit1 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.

The alternative minimum tax (AMT) is a supplemental income tax imposed by the United States
federal government required in addition to baseline income tax for certain individuals,
corporations, estates, and trusts that have exemptions or special circumstances allowing for lower
payments of standard income tax. AMT is imposed at a nearly flat rate on an adjusted amount of
taxable income above a certain threshold (also known as exemption). This exemption is
substantially higher than the exemption from regular income tax.

Regular taxable income is adjusted for certain items computed differently for AMT, such as
depreciation and medical expenses. No deduction is allowed for state taxes or miscellaneous
itemized deductions in computing AMT income. Taxpayers with incomes above the exemption
whose regular Federal income tax is below the amount of AMT must pay the higher AMT
amount.

1
Profit as per the profit and loss account submitted to shareholders in its Annual General Meeting by a company,
subject to certain adjustments as directed by explanation to section 115JB of the Act
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 MinimumAlternate Tax

A predecessor "minimum tax", enacted in 1969, imposed an additional tax on certain tax benefits
for certain taxpayers. The present AMT was enacted in 1982 and limits tax benefits from a
variety of deductions. On January 2, 2013, President Barack Obama signed the American
Taxpayer Relief Act of 2012, which indexes to inflation the income thresholds for being subject
to the tax.2

OBJECTIVE
The objective of this project is to study about the provisions that relate to minimum Alternate
Tax.

RESEARCH METHODOLOGY
The researcher has relied on doctrinal methodology, which includes books, journals, articles,
websites, etc.

SOURCES OF DATA
The research work is based on both primary and secondary sources of data.

2
Tonnage Tax is an alternative method of calculating corporation tax profits by referencing to the net tonnage the
ship operated instead of income.
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 MinimumAlternate Tax

CHAPTER 2
BACKGROUND ON MINIMUM ALTERNATE TAX
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 115J3.

Section 115J4 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

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Income Tax Act 1961
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Income Tax Act 1961
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 MinimumAlternate Tax

total income of such company. The tax payable for the relevant year for such company shall then
be 18.5% of its book profit.

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 5 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%.

5
An alternative method of calculating corporation tax profits by referencing to the net tonnage the ship operated
instead of income.
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 MinimumAlternate Tax

CHAPTER 3

MINIMUM ALTERNATE TAX ON FOREIGN INVESTORS

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 available6. 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

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AAR No. 999 of 2010, dated 14 August 2012
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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 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 treaty7.

On the other hand, on 14 August 2012 the AAR in a ruling delivered in the case of Castleton
Investments Ltd 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 8. 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
7
ITA Nos. 5364/Del/2010 and 5104/Del/2011
8
The Bank of Tokyo-Mitsubishi UFJ Ltd v. ADIT
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 MinimumAlternate Tax

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.
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 MinimumAlternate Tax

CHAPTER 4
APPLICATION OF MINIMUM ALTERNATE TAX
MAT is applicable to Companies, Domestic and Foreign. MAT is levied on all corporate entities.
Foreign companies with Indian income source. Though individuals, HUFs, Partnership firms,
etc. are excluded from applicability of MAT, they are now subjected to Alternate Minimum Tax
(AMT) u/s 115JC. Income from charitable activities are excluded under MAT. Companies
dealing with infrastructure and power sectors are also excluded.
MAT is the difference between the tax calculated under normal provisions and the tax calculated
under the MAT provisions of the Act. The difference (excess tax paid) under the normal
provisions of the income tax act can be claimed in the subsequent years in which the company is
subject to normal tax rate which is higher than MAT.
MAT Calculation for AY 2018-19 with Example
For example In XYZ Company, Taxable income as per regular / normal provisions of Income
Tax Act is Rs 40 lakh and books a profit of Rs. 75 lakh for the FY 2016-2017.
Lets calculate the taxes in both the provisions:

Lets calculate the taxes in both the provisions:

1. Tax as per normal provision:
INR 40,00,000 * 25% + 3% = 10,30,000
2. Tax as per MAT provision:
INR 75,00,000 * 18.5% + 3% = 14,29,125

Hence Tax payable by the XYZ Company will be INR 14,29,125.

MAT Credit will be: MAT = 14,29,125 – 10,30,000= INR 3,99,125

The concept of MAT was introduced under ITA to tax companies making high profits and declare
dividends to their shareholders but have no significant taxable income because of exemptions,
deductions and incentives. The primary cause is not tax evasion or a lack of adequate

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government policies but the feature of tax system – incentives, deduction and exemptions The
intent of introducing MAT was to ensure that no taxpayer with substantial income can avoid tax
liability by using exclusions, deductions and incentives. The Companies Act and Income Tax Act
deals in different situation hence they both have different provisions regarding allowable
expenditures. The expenses disallowed under companies act are also disallowed under income
tax act, but there are some expenditure which are disallowed under income tax but still allowed
to be deducted while calculating the profits under Companies Act. With the result of such
provisions the companies are able to reduce their profits and pay low revenue to the credit of
government. For example: In the judgment Echjay Forgoings P Ltd. It was decided: if the sum is
debited to the profit and loss a/c under the provisions of companies act, it will not be added to
compute Book profit, even if the same is disallowed under the income tax act.

Presently Minimum Alternate Tax is applicable to Companies (Domestic and Foreign) But here
only MAT on company’s u/s 115JB is discussed. Under the provisions of Section 115JB, where
the income tax calculated under the income tax act is less than 18.5 % of the book profit, then
such book profit shall be deemed to the total income of the assessee and tax payable by the
assessee shall be 18.5 % on book profits. How to compute Book profit is already discussed. No
additions or subtraction can be made from the profit declare by the company in accordance with
the provisions of companies act, other than the items mentioned under section 115 JB (i.e. items
mentioned – how to calculate the book profit for MAT applicability) Advance tax is applicable, if
tax is computed on the 18.5% of book profits.

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 MinimumAlternate Tax

CONCLUSION
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 9 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%.

9
AIR 1982 SC 1444
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 MinimumAlternate Tax

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.

Some have proposed abolishing the regular tax and modifying and indexing the AMT. A proposal
to the 2005 President's Advisory Panel on Federal Tax Reform advocated increasing the AMT
exemption to $100,000 ($50,000 for singles) and indexing it thereafter, applying a flat 25% rate,
and allowing appropriate exemptions for income-producing activities, in addition to repeal of the
regular tax.

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BIBLIOGRAPHY

PRIMARY SOURCES

Income Tax Act 1961

SECONDARY SOURCES

Books:

 Problems and Solutions in Income Tax by Dr HC Mehrotra and Dr SP Goyal

 Income Tax Law & Practice (59th Edition A.Y 2018-19) Sahitya Bhawan Publications

 Direct Taxes Ready Reckoner (41st Edition A.Y. 2018-19 & 19-20) by Dr.VK.Singhania

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