Vinu: Hey Manu, I came across something called Minimum Alternative Tax (MAT) while reading about corporate taxes. Can you explain what it is?

Manu: Of course, Vinu! MAT is a provision under the Indian Income Tax Act, introduced to ensure that companies pay a minimum tax, even if they claim a lot of deductions and exemptions. It applies when a company's regular tax liability is less than 15% of its book profit.

Vinu: So, even if a company has several deductions and pays less tax, MAT ensures they still pay a minimum amount?

Manu: Exactly. Under Section 115JB, companies are required to pay at least 15% of their book profits as tax. This ensures that companies with substantial profits don’t end up paying little to no taxes by taking advantage of exemptions.

Vinu: I see. What do you mean by book profits?

Manu: Book profits are the profits shown in a company's profit and loss account, prepared according to the Companies Act. But there are certain adjustments made, like adding back provisions for bad debts, deferred tax, and other specific items, as per the Income Tax Act.

Vinu: Interesting. How is this different from regular tax?

Manu: Normally, companies pay tax on their taxable income, which is calculated after applying deductions. However, if the tax on this taxable income is less than 15% of the book profits, the company has to pay MAT instead. So, MAT ensures that companies with deductions still pay a minimum level of tax.

Vinu: That makes sense. How does a company know whether it has to pay MAT or regular tax?

Manu: The company calculates two amounts:

Tax on taxable income (under normal provisions).

Vinu: Could you give me an example to make it clearer?

Manu: Sure! Let’s assume a company has:

Taxable income: ₹8 crore

Vinu: Got it! But what if a company pays MAT one year and its regular tax is higher in another year?

Manu: Good question! If a company pays MAT, the excess of MAT over regular tax can be carried forward as MAT credit for the next 15 years. This credit can be set off against the regular tax liability in future years.

Vinu: That’s really helpful to know! Thanks for explaining this in detail, Manu.

Manu: Anytime, Vinu! MAT is an important tool to ensure companies with high profits still pay a minimum tax.