E-Paper
MAT’s slow fade: why India is nudging companies into the new tax regime
India's 2026 Finance Bill proposes changes to Minimum Alternate Tax, reducing rates and limiting credits, pushing companies to adopt a new tax regime.
Minimum Alternate Tax (MAT) is a backstop corporate tax under Indian law that requires a company to pay at least 15% of its book profit when its normal income-tax liability is lower. MAT was introduced to bring so-called zero-tax companies with substantial book profits but little or no taxable income, often due to tax incentives or exemptions, into the tax net. Any MAT paid in excess of normal tax in a year could be carried forward as MAT credit to set off regular income-tax liability in subsequent years, subject to limits.
In 2019, the Indian Government reformed corporate tax by allowing domestic companies to opt into a new regime. Under this regime, a concessional rate of 22% applied if a company gave up specified incentives and holidays, and such companies were exempt from MAT. Under the old regime, domestic companies continued to be taxed at 25 or 30% (depending on turnover in preceding years). Those companies could still claim incentives and holidays, but they were subject to MAT.
Many Indian companies with accumulated MAT credit elected to remain in the old regime so they could set off that credit against taxes payable under regular provisions in later years. This way, several companies kept their effective tax rate close to 15% by utilising MAT credits.
To encourage a shift to the new regime, the Finance Bill 2026 proposes to overhaul the MAT rules. While MAT on book profit is proposed to be reduced from 15 to 14%, substantive limits would be imposed on the use of MAT credit.
For companies staying in the old regime, all previously accumulated MAT credit will lapse. They can claim the benefit of their accumulated MAT credit only if they opt into the new regime in the 2026-2027 tax year. Even then, MAT credit can be used solely to set off up to 25% of taxes payable under the regular provisions.
Moreover, no MAT credit will be available for MAT paid by companies from the 2026–2027 tax year. In other words, going forward, MAT will operate as a final tax liability.
These proposed changes are likely to push Indian companies that have been holding MAT credits to opt into the new regime.
Foreign companies that have a permanent establishment in India (such as a branch office) are also subject to MAT. As foreign companies are taxed at 35% and cannot opt into the concessional corporate rates, accumulated MAT credits relating to tax years before 2026–2027 will continue to be available to set off against future ordinary income-tax liability. However, any MAT paid for tax years 2026–2027 onwards will be a final tax liability. This will also affect branch offices of foreign companies in GIFT City, where MAT paid at 9% of book profits will now be a final tax.
(Gouri Puri is Partner and Nimish Malpani is Principal Consultant at Shardul Amarchand Mangaldas & Co. Views are personal.)
