Minimum Alternate Tax (MAT) is a tax imposed on companies in India, regardless of whether they are profitable or not. The tax is intended to ensure that companies that have high book profits but pay little or no income tax still contribute to government revenue.
MAT is calculated on the basis of the company's book profits, which are defined as gross total income minus deductions and exemptions allowed under the Indian Income Tax Act. The tax is levied at a rate of 18.5% of the book profits, and companies are required to pay the higher of their regular income tax liability or their MAT liability.
The tax was introduced in India in the late 1980s as a means of ensuring that companies that use tax exemptions and deductions to reduce their tax liability still contribute to government revenue. The purpose of the tax is to prevent companies from using tax havens and other legal means to avoid paying taxes.
It's worth noting that there have been ongoing debates about the impact of MAT on companies and its effectiveness in achieving its goal of increasing government revenue, and the Indian Government has made some changes to the MAT rate and rules over time.
What is The Reason Behind The Creation of MAT?
Minimum Alternate Tax (MAT) was created to bring the ‘zero-tax paying companies’ within the ambit of income tax and make them pay a minimum amount in tax to the government. It is applied when the taxable income is found to be less than 15.5% (plus surcharge and cess as applicable) of the book profit under the Companies Act, 2013.
In 2019, the government reduced the MAT tax rate from 18.5% to 15%. MAT is levied on book profit, unlike normal corporation tax, which is levied on taxable profit. No MAT would be imposed on new domestic manufacturing company (incorporated on or after October 1, 2019)