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Minimum Tax

Updated on July 18, 2023

The term “minimum tax” refers to a provision in the tax system that ensures that businesses or individuals with substantial economic activities pay a minimum amount of tax, regardless of their actual taxable income. It is designed to prevent tax avoidance or aggressive tax planning strategies that may result in a significant reduction in tax liabilities. The concept of minimum tax aims to establish a fair and equitable taxation system by ensuring that taxpayers contribute a minimum level of tax, irrespective of deductions, exemptions, or losses they may have claimed. It serves as a safeguard to prevent individuals or businesses from exploiting loopholes or engaging in tax planning strategies that erode the tax base.

What is the Minimum Alternative Tax (MAT)?

The minimum tax provision in India is commonly referred to as the “Minimum Alternate Tax” (MAT) for companies and the “Alternate Minimum Tax” (AMT) for individuals, Hindu Undivided Families (HUFs), or other taxpayers.

For Companies (MAT) –

MAT requires companies to pay a minimum tax based on a certain percentage of their “book profits,” even if their regular taxable income is lower, after making adjustments for non-deductible or exempt items.

For Individuals and Others (AMT) –

AMT applies to individuals, HUFs, and others not subject to MAT, mandating the payment of a minimum tax if their regular taxable income is lower than a specified percentage of adjusted total income, after certain adjustments and disallowances.

The minimum tax payable under MAT or AMT is generally a predetermined percentage of book profits or adjusted total income, subject to potential revisions by the government through budgetary announcements.