About fiis, mat and the recent controversy (part 1)

What is Minimum Alternate Tax (MAT)?

Many times a taxpayer, being a company, has generated sufficient income during the year, but has managed to avoid paying taxes (or paying a negligible amount) by taking advantage of the various provisions in the Income tax law (like exemptions, deductions, depreciation, etc). Due to a substantial increase in the number of ‘zero taxpaying companies’, a tax called Minimum Alternate Tax (MAT) was introduced by the Finance Act, 1987 with effect from assessment year 1988-89. Later on, it was withdrawn by the Finance Act, 1990 and then reintroduced by Finance (No. 2) Act, 1996, wef 01-04-1997. The objective for introducing MAT was to bring “zero tax companies” into the tax net; which in spite of having earned substantial book profits and having paid handsome dividends, were not paying any tax. Since the introduction of MAT, several changes have been introduced in its provisions and today it is levied on companies as per the provisions of section 115JB.

Basic provisions of MAT

As per the provisions of MAT, the tax liability of a company will be higher of the following:

  • Tax liability of the company computed as per the normal provisions of the Income-tax Law, i.e., tax computed on the taxable income of the company by applying the tax rate applicable to the company. Tax computed in above manner can be termed as ‘normal tax liability’.
  • Tax computed @ 18.5% (plus surcharge and cess as applicable) on book profit (discussed later). This tax is called the ‘Minimum Alternate Tax’.

What is Book Profit

As per Explanation 1 to section 115JB(2) “book profit” for the purposes of section 115JB means net profit as shown in the P & L Account prepared in accordance with Schedule VI of the Companies Act [now Schedule III to the Companies Act, 2013] as increased and decreased by certain items prescribed in this regard.


As per section 115JB, every taxpayer being a company is liable to pay MAT, if the Income tax (including surcharge and cess) payable on the total income, computed as per the provisions of the Income-tax Act in respect of any year is less than 18.50% of its book-profit + surcharge (SC) + education cess (EC) + secondary and higher education cess.

From the above it can be observed that the provisions of MAT is applicable to every company whether public or private and whether Indian or foreign. However, as per section 115JB (5A) MAT shall not apply to any income accruing or arising in a life insurance company referred to in section 115B. Further, as per provisions of Section 115V-O, MAT will not apply to any shipping income liable to tonnage taxation, i.e., tonnage taxation scheme as provided in section 115V to 115VZC.

Thus, when the MAT provisions were introduced, the intention of the Legislature was clearly to tax certain companies who were otherwise profitable but who were not paying income-tax on account of various deductions. However, what is more important to note is that at the time of introducing the MAT provisions, the then government had Indian companies on its radar. This is obvious from the Memorandum to the Finance Bill 1987. In the Memorandum, there is a clear reference to deductions from profits and gains of business or profession and also to Chapter VIA deductions. The computation mechanism laid down for MAT also envisages a “net profit as per profit and loss account”. It is a no brainer that for a company to have a profit and loss account, it is necessary to have books of account.

What is the controversy?

In the Finance Bill 2015, the present Finance Minister Mr. Jaitley has proposed certain relaxations for FIIs/ FPIs on the MAT front. The relevant portion of the Minister’s speech is reproduced below:

In order to rationalize the MAT provisions for FIIs, profits corresponding to their income from capital gains on transactions in securities which are liable to tax at a lower rate, shall not be subject to MAT.

Prior to Budget 2015, there had been a few press reports where references were made to the levy of MAT on FIIs. At that point of time, it was not a major controversy. Only a handful of FII may have got notices from the tax department asking them to pay MAT on their profits or asking them to show cause why MAT should not be levied on their profits. Such action on the part of a few ingenious tax officers was creating an uncertainty. Before the matter ballooned into a full blown controversy, several representations had been made to the Finance Minister to clarify in the Budget that MAT was not applicable to FIIs. It was in response to such representations that the amendment was proposed in the Budget. Thus, the said amendment was meant to be and is a clarificatory amendment. Unfortunately, the amendment that has actually been proposed in section 115JB is slated to be effective F.Y. 2015-16 (relevant to Assessment Year 2016-17).

Major controversy started when few more foreign portfolio investors, or foreign funds that invest in Indian stock markets, had received notices for liabilities under MAT to the tune of Rs. 40,000 crores (amount as ascertained by the Indian media, which was later clarified by the Government of India to be Rs. 600-700 crores). But how is this possible, especially after Mr. Arun Jaitley said in his recent Budget speech that he was exempting foreign investors from paying MAT? True, he said that, but that is effective only from April 1, 2015, and does not cover previous years.

To be continued…

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