What is MAT and why am I paying tax on a loss?
MAT is a minimum charge computed from the profit shown in your accounts rather than from taxable income. The reasoning behind it is that a company can use deductions, allowances and brought-forward losses to reduce taxable income to very little while its accounts still show a profit to shareholders. The minimum charge takes the accounting result, adjusts it in defined ways, and taxes that instead where the outcome is the larger amount. So paying tax on a loss usually means a tax loss rather than a book loss. The accounts showed a profit, and that is the figure the charge works from.
Does MAT apply to a foreign company operating in India?
It can, and the point was the subject of a long dispute. The practical question is whether the foreign company has a presence in India that produces Indian accounts at all, because a charge computed from book profit needs a set of books to compute it from. Where the company operates through a branch or a permanent establishment, this becomes a real planning point rather than a theoretical one. Where its only Indian income is investment income taxed at source, the analysis is different. Settle the presence question first, because the minimum tax question follows on from it.
Can MAT paid in one year reduce tax in a later year?
Yes, through the credit mechanism, and that is why the charge is described as a minimum rather than as an additional tax. Where the minimum charge exceeds the tax computed in the ordinary way, the excess is carried forward and set against ordinary tax in a later year in which the ordinary computation is the higher of the two. The credit is therefore only worth something if the company expects to return to ordinary taxable profits inside the carry-forward window. For a company winding down, or permanently sheltered by reliefs, the charge is effectively final. Model it before assuming recovery.
Is MAT charged on book profit or on taxable income?
On book profit, which is why accounting policy matters to the tax outcome here in a way it usually does not. The starting point is the profit in the statutory accounts, and the computation then applies a defined list of additions and deductions to it. Items that never appear in the tax computation, such as certain provisions, revaluation movements and amounts credited directly to reserves, can therefore change the charge. It follows that a change of accounting treatment can move the tax even where nothing about the business has changed, and that the accounts must be final before the position can be settled.
Does a tax treaty protect my company from MAT?
A treaty allocates taxing rights over categories of income. It does not generally exempt a resident company from a domestic minimum charge computed on its own accounts. Where the treaty does matter is upstream: whether India has the right to tax the profits at all, through a permanent establishment or otherwise. If the answer is no, there is no Indian computation for a minimum to apply to. If the answer is yes, expect the domestic machinery, minimum charge included, to apply to the profits attributed to the Indian presence. Take the treaty question first and the minimum charge question second.
Which adjustments change book profit for MAT?
The computation works from a defined list rather than from judgement, which is both the difficulty and the protection. Broadly, it adds back amounts that reduced accounting profit but are not allowed for this purpose, and removes amounts that inflated it, so that the result is a comparable measure across companies. Because the list is defined, the arguable questions are usually about characterisation in the accounts rather than about the adjustment itself, since how an item was presented decides whether an adjustment reaches it. That is why the analysis has to start with the statutory accounts as signed.
Which country do I pay tax to first?
Generally the source country — where the income arises — taxes first, often by withholding before you receive it. Your country of residence then taxes the same income and credits what the source country took. That order is why timing matters: a residence-country return filed before the source-country tax is settled has nothing to credit yet. Getting the sequence right is most of the work. See international tax planning.
Is double taxation illegal?
It is legal. Two countries can each have a valid claim on the same income — one because the income arose there, the other because you live there — and nothing prohibits both from exercising it. What exists instead is relief: tax treaties allocate the claim, and domestic law gives a credit for foreign tax paid. The relief is not automatic, though. It is claimed on a return, and unclaimed relief is simply lost. See how double taxation is relieved.
