What is MAT?

Imagine companies making millions of cash flow however end up paying nil taxes by taking advantage of depreciation, deductions, exemptions, etc from the government. 

So the government imposes a MAT as an advance tax on these companies. This makes the companies give at least a minimum amount of tax every year.

Let’s dive in

What is Book Profit & Income Tax Profit

Book Profit is calculated as per Companies Act & Income Tax Profit of a company is calculated on the basis of Income Tax Act.

Why Two Profits?

There is usually a difference between the book profit and income tax profit due to different laws, deductions & many companies do prior tax planning to minimize their tax by reducing their Income Tax Profit.

That’s where MAT was Introduced, as companies were declaring Book Profits and paying bonuses/dividends but when It came to paying taxes they simply said no Income Tax Profit

To curb this, In 1983, the government introduces MAT to make such companies pay income tax.

Now if the company is into loss as per Income Tax and Profit as per Companies Act then the company need to pay MAT at 18.5%

Simple, No

Let us understand the Calculation of MAT with an example:

The taxable income of a company TAM as per Income Tax Act, 1961 is Rs. 10 lakhs.

Therefore, tax liability at the rate of 22% corporate tax will be Rs. 2.2 lakhs along with the cess and surcharge.

On the other hand, as per MAT provisions, the book profit of this company is Rs 20 lakhs. Therefore, MAT at the rate of 18.5% of book profit will be 3.7 lakhs along with cess and surcharge.

MAT is higher than the Income-tax liability, therefore the company will have to pay 3 lakh rupees along with cess and surcharge.


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