Budget 2024: More clarity on MAT expected amid push for global tax reforms

India needs to do some tinkering with local tax laws to implement pillar two in line with the Global Anti-Base Erosion Rules (GloBE). (Representative image)

Union Budget 2024-25 is likely to shed some more light on the minimum alternative tax (MAT) structure, the worldwide digital economy parlance, as India joins the movement for a global minimum corporate tax rate.

India has implemented the minimum alternative tax structure or alternate minimum tax (AMT) at home to check tax avoidance by corporations. The country at various international forums, such as G20 and OECD, has agreed to bring multi-national corporations under a minimum global tax slab irrespective of the place of origin.

G20 leaders under India’s presidency last year agreed on a swift implementation of global tax reforms which involve a global minimum corporate tax rate and a structure on digital economy taxation. The reforms are dubbed a two-pillar solution.

The first pillar of the solution proposes reassigning some taxation rights over MNCs, specially tech giants which are operating from tax havens to avoid corporate tax liabilities, to the home country where these are earning a significant amount of profits.

The second pillar of the reform is implementation of a global minimum tax of 15% to check avoidance of corporate income tax liability.

India needs to do some tinkering with local tax laws to implement pillar two in line with the Global Anti-Base Erosion Rules (GloBE). Some of the tax incentives provided by India are at variance with GloBE rules even as the country moved to the minimum alternative tax regime years back.

India for the first time implemented MAT from assessment year 1988-89. The tax structure was withdrawn in 1990 and reintroduced in 1997. Several changes were made in the MAT rules which are now levied on companies as per the provisions of Section 115JB of Income Tax Act, 1961.

What is Minimum Alternative Tax?

In simple terms, the MAT is a minimum tax that a corporation needs to pay, even if it falls under zero tax limit.

The main aim of the MAT is to bring into the tax net corporates that do not pay any tax by taking the benefit of various exemptions provided under the Income Tax laws. Such companies are called zero-tax companies as these avoid tax payments despite earning book profits or paying dividends.

Corporates need to pay a MAT of 15% plus surcharges and cesses on book profits in India. The tax liability of a company is the maximum of normal tax liability or MAT.

The minimum tax liability for entities other than corporations is called alternate minimum tax.

Finance Minister Nirmala Sitharaman in Budget for 2022-23 brought down the Alternative Minimum Tax on cooperative societies to 15% from 18.5%.