CIA - 1

Taxation Management

NAME - Adityansh Abhinav

CLASS - 6 BBA G

REG NO - 2120738
Introduction to the Normal Tax and Minimum
Alternate Tax ( MAT)
Normal Tax:

Normal Tax refers to the regular income tax that companies and individuals are required to pay based on
their taxable income as per the provisions of the Income Tax Act. The tax rates are determined by the
government and may vary depending on the income slabs. In the context of a domestic company, the normal
tax is calculated on the total income by applying the specified tax rates, surcharge, and health and education
cess.
For domestic companies, the government may impose surcharges on the normal tax in case the total income
exceeds certain thresholds. These surcharges are designed to collect additional revenue from companies with
higher profits. Health and education cess are also levied to contribute towards health and education
initiatives.

Minimum Alternate Tax (MAT):

Minimum Alternate Tax (MAT) is a provision under the Income Tax Act designed to ensure that companies,
even if they have significant book profits, do not escape taxation through various exemptions and deductions.
MAT is applicable to companies that report book profits but have a lower taxable income as per the normal
provisions of the Income Tax Act.
MAT is calculated as a percentage of the book profit, and it ensures that companies pay a minimum amount
of tax, irrespective of the deductions and exemptions they may have under normal provisions. The
calculation involves applying the MAT rate to the book profit, along with surcharge and health and education
cess.
The idea behind MAT is to ensure that profitable companies contribute to the tax revenue of the country,
even if they have reduced their taxable income through legal means. MAT helps in preventing tax avoidance
and ensuring a fair share of tax from companies with significant book profits.

Comparison and Decision-Making:

When deciding between Normal Tax and MAT, companies evaluate their financial situations and the tax
implications under both methods. Factors such as deductions, exemptions, and credits available under normal
provisions, as well as the impact of surcharge and cess, are considered. The company will choose the method
that results in a lower tax liability.
It's essential for companies to analyze their financial statements, including book profits, to determine the
most tax-efficient approach. Both Normal Tax and MAT play crucial roles in the taxation framework,
offering flexibility and ensuring fair contributions from companies with varying financial structures.

Question
 Gummy Bear Ltd is a newly incorporated _______ company. Currently, In the case of a Domestic Company,
Income Tax payable shall be higher of the following Two Amounts:
(i) Tax on total income computed as per the normal provisions of the Income Tax act by charging
special rates and normal rates applicable as increased by;
Surcharge of 7% where Total Income exceeds Rs. 1 crore minus marginal relief plus health and
education cess @ 4%
Surcharge of 12% where Total Income exceeds Rs. 10 crores minus marginal relief plus health and
education cess @ 4%
(ii) 15% of book profit as increased by
7% surcharge where book profits exceed Rs. 1 crore minus marginal relief plus health and education cess @
4%
Surcharge of 12% where Book Profits exceed Rs. 10 crore minus marginal relief plus health and education
cess @ 4%
Assuming hypothetical transactions and figures suggest the firm under what circumstances it is beneficial to
choose Normal Provisions or MAT-based taxation.

Particulars Amount :-

Particulars Amount

Net Pro t 5,50,000

Proposed Dividend 2,00,00,000

Income Tax 2,70,00,000

Provision for reduction in value of investments 70,00,000

Depreciation debited to P&L (which includes 90,00,000

depreciation on revaluation of Rs. 3,00,000)
Unabsorbed losses brought forward 1,80,00,000

Unabsorbed depreciation brought forward 1,80,00,000

Deferred Tax 15,00,000

Solution :-
fi
 Net Pro t 5,50,000
Proposed Dividend 2,00,00,000
Income Tax -2,70,00,000
Investment Reduction -70,00,000
Deferred Tax -15,00,000
Depreciation (P&L) 90,00,000
Unabsorbed Losses 1,80,00,000

Unabsorbed Depreciation 1,80,00,000

Book Pro t 3,00,50,000
(15% of Book Pro t) - A 45,07,500

7% of A - B 3,15,525

A+B 48,23,025

4% OF A+B 1,92,921

MAT 50,15,946

Under Normal Provisions:

Assuming Tax Percentage is 30% under Normal Provisions

Taxable Profit = 550000 + 20 - = 20550000
Tax = 30% of 20550000 = 61,65,000

Tax under MAT = 5015946

Conditions favoring the adoption of MAT-based taxation with Cess and Surcharge are less common, as the
presence of cess and surcharge tends to elevate the MAT liability. However, circumstances aligning with the
following scenarios may make this approach more viable:
1. Limited Deductions and Exemptions with Close Alignment to Book Profit:
• Opting for MAT-based taxation becomes more feasible when a company has constrained
opportunities for deductions and exemptions. This is particularly true when the taxable income
closely mirrors the book profit. In such cases, even with the additional burden of higher MAT
rates, including cess and surcharge, the total tax liability might still be lower than the
anticipated future normal tax liability.
2. Expectation of MAT Credit Utilization in Future Years:
• Companies may choose MAT-based taxation when they anticipate the future utilization of
MAT credits. This could be a strategic move to offset the higher initial taxes paid under MAT
fi
fi
fi
 against future tax liabilities under normal provisions. By planning to use MAT credits in
subsequent years, the company aims to mitigate the impact of the elevated MAT liability in the
current period.
In summary, the decision to opt for MAT-based taxation, despite the presence of cess and surcharge, hinges
on scenarios where deductions and exemptions are limited, taxable income closely aligns with book profit,
and there is a strategic plan to leverage MAT credits for offsetting future tax liabilities.