The Government has proposed a comprehensive rationalisation of the Minimum Alternate Tax (MAT) framework to simplify corporate taxation and facilitate a smoother transition from the old tax regime to the new tax regime. The proposed changes, introduced through Clause 50, will take effect from 1 April 2026 and apply from tax year 2026-27 onwards.
Existing MAT Framework Under the Income-tax Act, 2025
Under the current provisions of Section 206 of the Income-tax Act, 2025, MAT is applicable to companies and is levied on book profits at the rate of 15%, excluding units located in an International Financial Services Centre (IFSC). Where the MAT liability exceeds the tax payable under normal income-tax provisions, companies are required to pay MAT instead of regular tax.
To mitigate the impact, the excess MAT paid over regular tax is presently allowed as MAT credit, which can be carried forward for up to 15 years and set off in years where the normal tax liability exceeds MAT. This credit mechanism currently operates only under the old tax regime.
MAT to Become Final Tax in Old Regime
As part of the proposed rationalisation, the Government intends to make MAT a final tax under the old tax regime. Accordingly, no fresh MAT credit will be allowed for tax paid under MAT provisions in the old regime. This marks a significant shift from the existing credit-based system and is aimed at reducing long-term complexity and litigation.
To offset the impact of making MAT final, the MAT rate has been reduced from 15% to 14% of book profit, offering immediate tax relief to corporates continuing under the old regime.
Restricted Set-Off of MAT Credit in New Tax Regime
The proposal also introduces a revised approach to utilisation of existing MAT credit in the new tax regime :
- Domestic companies opting for the new regime will be allowed to set off MAT credit up to 25% of their tax liability.
- Foreign companies will be permitted to set off MAT credit to the extent of the difference between normal tax liability and MAT in the year where normal tax exceeds MAT.
These calibrated limits aim to balance revenue considerations while ensuring fairness to taxpayers.
Facilitating a Smooth Regime Transition
According to the Government, the proposed amendments are intended to enable a smoother and more predictable transition from the old regime, which allows exemptions and deductions, to the simplified new tax regime. By removing perpetual MAT credit accumulation and lowering the MAT rate, the changes seek to enhance certainty in corporate tax planning.
Effective Date
The revised MAT provisions will come into force from 1 April 2026 and will apply to tax year 2026-27 and subsequent years.
Key Takeaway
The rationalisation of MAT signals a move towards a simpler and more transparent corporate tax system . While MAT becoming a final tax under the old regime marks a structural change, the reduction in rate and limited carry-forward in the new regime are expected to ease the transition and reduce long-term disputes.
Official copy of the Clause is as follows
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