The Indian government, in the 1980s, noticed a strange phenomenon. Some companies that were recording healthy profits were still paying zero taxes. These companies were using public utilities like roads and electricity - which were built using taxpayers’ money - to make their profits in the first place. Therefore it was considered unfair that these companies were raking in profits and paying large dividends to their shareholders - but not contributing to the well-being of the nation at large.

There was no point in initiating criminal proceedings against these companies, as they were using perfectly legal loopholes to pay zero taxes. They were using corporate tax deductions, liberal depreciation allowances and other tax incentives to pay zero taxes. These corporate income tax benefits were introduced with the right intentions. For instance, depreciation allowances were meant to cover up the natural wear and tear of machinery inherent in all industries. Over time, though, the corporates gamed the system and learned to decrease their tax burden to nil.

Therefore, the government introduced an alternate minimum tax to ensure that companies pay a baseline tax if their businesses were prospering. Alternate minimum tax, also known as Minimum Alternate Tax(MAT), has seen different rates over the decades. The current rate is 18.5%. The rate will come down to 15% in the next financial year 2020-21 - this step is meant to boost business growth and lift the economy. 

Before paying taxes, corporates must compare the following two numbers: 

  • Tax liabilities under the standard provisions of the Income Tax Act, which is calculated as 30% of their taxable income plus education cess and surcharge.
  • Tax liabilities under Minimum Alternate Tax provisions as given in Sec 115JB of the Income Tax Act. MAT is calculated as 18.5% of book profits plus the education cess and surcharge.

Companies must pay the higher of the two numbers as their annual income tax. 


If the MAT is higher and a company pays the requisite income tax accordingly, the company is eligible to claim the difference between MAT and the normal corporate tax as MAT credit. MAT credit can be used in a future year (it’s valid for 15 years) to set-off against future tax liability. For instance, suppose a company’s tax liability in 2020-21 is ₹9,00,000, and they have collected a MAT credit of ₹4,00,000 over the years. If the company chooses to use up all of its MAT credit, then it can decrease its tax liability in 2020-21 to ₹5,00,000.