Tuesday, 17 April 2012

Minimum Alternate Tax (MAT) a detailed study


Minimum Alternate Tax (MAT)

Minimum Alternate Tax (MAT) is payable by companies. The MAT rate for A.Y. 11-12 is 18%. Though there has been a consistent demand from companies from various sectors for its removal, the Government continues with this tax.
The article covers MAT in full detail. It also discusses about accounting aspects of MAT. MAT under Direct Tax Code has also been discussed in the article.

Authors


Hemant Karnani- He qualified CA Final exams in June 2009 securing 10th rank. He also secured 39th rank in PE-II. He is currently in the final period of his articleship. He can be reached at hemant11000@gmail.com.



CA Madhusudan Kr. Poddar- He is an ACA. He qualified in Nov 2008. His membership no. is 068355. Presently he is working with Saraf Group of Companies, Kolkata as Accounts Manager. He can be reached at madhufca2005@yahoo.co.in.

Why was MAT introduced?

The concept of Minimum Alternate Tax (MAT) was introduced in the direct tax system to make sure that companies having large profits and declaring substantial dividends to shareholders but not paying tax to the Govt by taking advantage of the various incentives and exemptions provided in the Income-tax Act, pay a fixed percentage of book profit as minimum alternate tax. Though there has been a consistent demand from companies from various sectors for its removal, the Government continues with this tax. Looking at the proposed provisions of DTC, it appears that the Government is very clear that it wants to continue with MAT.

Non Applicability


The provisions of MAT contained in section 115JB would not apply to the following incomes accruing or arising on or after 1st April 2005 –
  1. Income from any business carried on by an entrepreneur in a SEZ (10AA);
  2. Income from the services rendered by an entrepreneur from a unit in a SEZ (10AA);
  3. Income of a Developer from the development of a SEZ. (80IAB)

Rate of MAT


It is provided that in case of company (domestic or foreign) , if the income-tax payable on the total income computed under the Income-tax Act, is less than 18% of its book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of income-tax at the rate of 18% (add surcharge, if applicable, i.e. 7.5% for domestic companies and 2.5% for foreign companies, where the total income exceeds Rs.1 crore) and Education cess @2% and secondary and higher education cess@1% shall be added on the aggregate of income-tax and surcharge.
The rate at which MAT is charged has been increasing since its inception. Following table shows the rates of MAT since it was introduced for the first time:-
Assessment Year
Rate of MAT (% of Book Profit)
Surcharge (if book profit exceeds Rs 1 crore)
2011-12
18
7.5
2010-11
15
10
2007-10
10
10
2001-07
7.5
10

 

Computation of Book Profit as per 115JB

The book profit shall mean the net profit as shown in the profit and loss account prepared in accordance with the provisions of Part II and III of Schedule VI to the Companies Act, 1956 as adjusted by certain additions/deductions as specified.
Net profit as per profit& loss account

xxx
ADD:


Income tax paid or payable**
xx

The amount of deferred tax and provision there of
xx

Depreciation charged  to P/L account
xx

Proposed dividend or dividend paid.
xx

Amount carried to any reserve
(Other than33AC).
xx

Provision made for diminution in value of assets.
xx

The amount of any expenditure relatable to any income u/s 10(except 10(38)) or 11or 12.
xx

Provision made for liabilities (Other than ascertained).
xx

Provision made for losses of Subsidiary company
xx
xxx
LESS:


Amount withdrawn from any Reserve or provision.
xx

The amount of any income relatable to any income u/s 10(except 10(38)) or 11or 12.
xx

Depreciation as per P&L a/c Excluding depreciation relatable to revaluation of assets.
xx

Amounts withdrawn from revaluation reserves and credited to p&l account, but it does not exceed the amount of depreciation.
xx

The amount of loss B/F or unabsorbed depreciation
Whichever less, as per book of accounts.
xx

The amount of deferred tax, if any such amount is credited to the profit and loss account.
xx
(xxx)
BOOK PROFIT

xxx

**

[It may be noted that income-tax includes -
  • Dividend distribution tax / tax on distributed income;
  • Interest;
  • Surcharge;
  • Education cess; and
  • Secondary and higher education cess]

MAT Credit entitlement (Section 115 JAA)

  1. This section provides that where tax is paid in any assessment year in relation to the deemed income under section 115JB(1), the excess of tax so paid over and above the tax payable under the other provisions of the Income-tax Act, will be allowed as tax credit in the subsequent years.
  2. The tax credit is, therefore, the difference between the tax paid under section 115JB (1) and the tax payable on the total income computed in accordance with the other provisions of the Act.
  3. The tax credit shall be allowed to be set off in a year in which tax becomes payable on the total income computed in accordance with provisions of the Act other than section 115JB.
  4. This tax credit is allowed to be carried forward for ten assessment years succeeding the assessment year in which the credit became allowable.
  5. Such credit is allowed to be set off against the tax payable on the total income in an assessment year in which the tax is computed in accordance with the provisions of the Act, other than 115JB, to the extent of excess of such tax payable over the tax payable on book profits in that year.

 

A Numerical Illustration 

 

Accounting for MAT


MAT credit entitlement will be treated as an asset and the accounting will be done by crediting the Profit & loss A/c, if there is a virtual certainty that the company will be able to recover the MAT credit Entitlement in future limited period. It will be disclosed under Loans and Advances. In the year of   adjustment full provision shall be made for Tax Liability, and in the Balance Sheet the Provision for Tax shall be shown net off MAT credit Entitlement.
Journal entries (AY-2009-10)
1) Profit and loss A/c………. Dr                                     190
To Provision for Tax                                                                     190
2) MAT Credit Entitlement A/c……… Dr                               90
To Profit and loss A/c                                                                   90
Journal entries (AY-2011-12)
1) Profit and loss A/c………. Dr                                     200
To Provision for Tax                                                                      200
The MAT credit entitlement will be shown as deduction from Provision for Tax in the Balance Sheet
Provision for Tax                                                       200
Less: – MAT credit entitlement                                        (50)
Net                                                                                 150

Does Advance tax apply to MAT?

Yes it is compulsory to pay advance tax in the case of MAT as mentioned in CBDT Circular No.13/2001 dated 09/11/2001. Also Karnataka High Court in the case of Jindal Thermal Power has held that advance tax is payable under MAT. The companies liable to pay MAT are liable for the payment of advance tax and failing to do so will attract interest u/s 234B and 234C of the Act.

Role of Chartered Accountant

Section 115JB, inserted by the Finance Act, 2000 has cast a responsibility on the chartered accountant to certify that the book profit has been computed in accordance with the provisions of the Income-tax Act. He has also to certify the income-tax payable by the company.

MAT under Direct Tax Code

The model adopted for MAT under existing law is based on book-profit. However, there is a marked shift in this respect as it is proposed to levy tax on the value of gross assets. While this will certainly achieve the objective of charging tax from the companies not paying the tax at all but it will also penalize the companies which are sloth. Certainly, clause 2(3) of DTC is hitting two birds with a single stone.
The DTC narrates the methodology to be followed for arriving at the value of GA as under:-
“Value of gross assets” will be the aggregate of the value of gross block of fixed assets of the company, the value of capital works in progress of the company, the book value of all other assets of the company, as on the last day of the relevant financial year, as reduced by the accumulated depreciation on the value of the gross block of the fixed assets and the debit balance of the profit and loss account if included in the book value of other assets.
The rate of MAT will be 0.25 per cent of the value of gross assets in the case of banking companies and 2 per cent of the value of gross assets in the case of all other companies.
Under the Code, MAT will be a final tax. Hence, it will not be allowed to be carried forward for claiming tax credit in subsequent years.

Effect of the new provision

The provisions of taxing Companies by MAT under Direct Tax Code shall have the following effect:
Positive:-
  1. Efficiency with which fund is utilized will improve.
  2. The tax collection will go up.
Adverse:-
  1. This will create industrial disparity as capital intensive industries viz Iron & Steel, Cement etc have to pay more than the labour intensive viz software industry. Thus it will reduce investments in Infrastructure and will dissuade investments.
  2. By not allowing credit of tax paid by way of minimum alternate tax, this tax is in the nature of wealth tax and not on income at all;
  3. This type of tax will clearly be an additional burden to loss making companies and will make their survival more difficult;
  4. In case of long gestation projects, this tax type of tax will further increase the cost of projects and might even make the projects unviable.
  5. It will result in double taxation as group financing is common, viz holding company having stake in there subsidiaries and granting them loan as well, and so both holding & subsidiaries have to pay tax on their gross assets. This will affect the financing of less reputed companies as they are not able to procure finance directly.

Conclusion

Actress Kareena Kapoor made herself famous and glamorous by becoming slim and achieving the zero figure fat in “Tashan”. MAT proposes the corporate sector to be slim and beautiful. It has been successful so far to burn the fat and make the sloth run; the new scheme will also do the same but in a different manner.


Collected by; Santhosh Thomas Thaikkadan, CS professional Student, Thrissur, Kerala.