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MAT vs AMT: Objectives, Applicability & Calculation
Indiaโs tax system landscape includes various provisions to ensure that every taxpayer pays a minimum amount of tax to the government, even if their taxable income is reduced materially due to various deductions, exemptions and incentives. Two such mechanisms are MAT (Minimum Alternate Tax) and AMT (Alternate Minimum Tax). While both serve similar purposes, they are applicable to different categories of taxpayers and have different frameworks and structure.
This blog explains what MAT and AMT are, their objectives, calculation methods, applicability, and the key differences between them.
What is MAT (Minimum Alternate Tax)?
Meaning:
MAT stands for Minimum Alternate Tax. It is a provision under the Income Tax Act, 1961 which is designed to bring certain companies into the tax net, even if they claim significant deductions and show minimal or no taxable income under normal tax provisions.
Objective:
MAT was introduced to prevent the large companies from avoiding tax liabilities by claiming various types of incentives, depreciation and exemptions, even while reporting significant profits in their financial statements or records...!
Legal Provision:
MAT is governed by Section 115JB of the Income Tax Act.
Applicability:
MAT is applicable only to companies โ both domestic and foreign companies โ that have a presence or income in India.
Calculation:
Under MAT, companies have to calculate their income tax liability under two methods:
- Regular income tax liability as per the normal provisions of the Act.
- MAT liability, which is 15% of the book profit (as per the companyโs profit and loss account prepared under the Companies Act), plus applicable surcharge and cess.
If the tax liability under the normal provisions is less than MAT, then the company has to pay tax under MAT.
For IFSC (International Financial Services Centre) units, MAT is levied at 9%.
Book Profit:
Book profit is calculated based on the net profit shown in the profit and loss account, with certain additions and the deductions as prescribed in the Act...!
MAT Credit:
If a company pays MAT (Minimum alternate tax) in a particular year, it can claim MAT credit in the subsequent years when its normal tax liability exceeds MAT. This credit can be carried forward for up to 15 assessment years under Section 115JAA.
What is AMT (Alternate Minimum Tax)?
Meaning:
AMT stands for Alternate Minimum Tax. It was basically introduced to ensure that non-corporate taxpayers who claim substantial amount of deductions under Chapter VI-A or other sections like 10AA (for SEZ units), also pay a minimum amount of tax.
Objective:
AMT serves a similar purpose as MAT, but for non-corporate taxpayers. It always ensures that individuals, partnerships, LLPs, and the others do not completely avoid tax by using available deductions and other incentives.
Legal Provision:
AMT is governed by Section 115JC to 115JF of the Income Tax Act...!
Applicability:
AMT is applicable to:
- Individuals, HUFs, AOPs, BOIs, partnerships (including LLPs), and others.
- Only when such persons claim deductions under Chapter VI-A (under Part C), Section 35AD, or Section 10AA (for SEZ units).
- It is not applicable if the adjusted total income does not exceed โน20 lakhs.
- Taxpayers liable under AMT must obtain a Chartered Accountantโs certificate in Form 29C.
Calculation:
Taxpayers liable under AMT have to calculate tax in two ways:
- Normal tax liability under applicable provisions.
- AMT liability, which is 18.5% of the adjusted total income plus surcharge and cess. (For IFSC units, AMT is 9%)
If AMT is always higher than the regular tax liability, then AMT has to be paid.
Adjusted Total Income:
Adjusted total income is the total income before deductions under Chapter VI-A (Part C) or Section 10AA.
AMT Credit:
Just like MAT credit, if a taxpayer pays AMT, they can claim AMT credit in future years when their regular tax liability exceeds AMT. It is also carried forward for up to 15 assessment years under Section 115JDโฆ!
Key Differences Between MAT and AMT
| Basis | MAT (Minimum Alternate Tax) | AMT (Alternate Minimum Tax) |
Applicable To | Only companies | Non-corporate taxpayers (e.g. LLPs, individuals, HUFs) |
Governing Section | Section 115JB | Sections 115JC to 115JF |
Trigger Condition | Low/no tax due to exemptions/incentives despite book profit | Claiming deductions under Chapter VI-A (Part C) or Section 10AA |
Tax Rate | 15% on book profits (plus surcharge and cess) | 18.5% on adjusted total income (plus surcharge and cess) |
Book Profit/Adjusted Income | Based on financial accounts as per Companies Act | Adjusted total income as per tax computation |
Minimum Income Threshold | No threshold | Applicable only if adjusted total income > โน20 lakhs |
Credit Carry Forward | 15 years | 15 years |
Objective | To tax companies using accounting adjustments | To tax non-corporates using tax deductions |
Example of MAT Calculation
A domestic company has a book profit of โน1 crore.
- Normal tax liability as per Income Tax Act: โน10 lakhs
- MAT liability = 15% of โน1 crore = โน15 lakhs
Since MAT > normal tax, the company pays โน15 lakhs as tax. It can claim โน5 lakhs as MAT credit in future years.
Example of AMT Calculation
A partnership firm has:
- Total income (before deductions): โน30 lakhs
- Deductions under Chapter VI-A (Section 80-IA): โน15 lakhs
- Regular taxable income: โน15 lakhs
- Normal tax liability: โน4.5 lakhs (30% of โน15 lakhs)
Adjusted total income = โน30 lakhs
AMT liability = 18.5% of โน30 lakhs = โน5.55 lakhs
Since AMT > normal tax, the firm pays โน5.55 lakhs and can claim โน1.05 lakhs as AMT credit in future...!
| Read More: TDS vs TCS |
Exceptions and Exemptions
For MAT:
- Companies opting for Section 115BAA or 115BAB (new manufacturing companies or companies opting for lower tax rates) are exempt from MAT provisions.
For AMT:
- Individuals, HUFs, AOPs, BOIs, etc., are not liable for AMT if adjusted total income โค โน20 lakhs.
- AMT is not applicable if no deductions under the prescribed sections are claimed...!
Impact on Tax Planning
MAT and AMT affect tax planning significantly:-
- Companies and LLPs must factor in MAT/AMT while claiming deductions or incentives.
- These provisions discourage aggressive tax planning aimed solely at avoiding taxes through deductions.
- Startups, SEZ units, and firms availing infrastructure or investment-based deductions must be aware of their MAT/AMT liability.
Conclusion
Both MAT and AMT are anti-avoidance measures under the Income Tax Act to ensure a minimum level of tax contribution from taxpayers who would otherwise significantly reduce or eliminate tax liability through legal deductions and exemptions.
While MAT targets companies using accounting loopholes, AMT focuses on the non-corporate taxpayers availing tax incentives. Both provisions emphasize the government's intention to maintain the tax equity and to improve the rate of revenue collections. If you need any professional assistance, contact CRSPL Business Consultants today.
Understanding the differences and applicability of MAT and AMT is important for the purpose of effective tax planning, compliance, and financial forecasting, especially for businesses and professionals claiming deductions under various provisions of the Income Tax Act.
