Taxation in India- CENVAT and MAT explained

Here are two very important concepts related to taxation. The first one is CENVAT Credit and the other is MAT.

CENVAT (Central value added tax) is the tax on Value Addition on the goods manufactured according to Central Excise & Customs Act. CENVAT was started from 1/4/2000 when it replaced MODVAT. As opposed to MODVAT, CENVAT does not include customs duty.

There are various services which the company avails in order to render services to its customers. As such any service tax paid on availing such services becomes the part cost of rendering the services.

This phenomena of tax on tax is called the cascading effect. Therefore the system of Cen vat credit was introduced by the Government. This allows the service provider to take the credit of tax paid for the service received. Therefore the tax paid does not become part of the cost of the service provided and cascading effect is avoided.
Minimum Alternate tax (MAT) was introduced to levy taxes on zero tax companies. A company pays tax on the income computed as per the provisions of the income tax act whereas the profit and loss account of the company is prepared as per provision of companies act. Zero tax companies are those companies that show book profits in books and also pay dividends but they don’t pay tax on account of claim of various incentives.

AMT (Alternate Minimum Tax) is similar to MAT. MAT is applicable on companies whereas AMT is applicable on all entities other than companies. Zero tax companies are required to pay a fixed percentage of book profits i.e. 18.5% as Minimum Alternate Tax. Whereas, any entity or individual whose adjusted total income exceeds Rs 20 lakhs is liable to pay Alternate Minimum tax @18.5%.

Reliance Industries Limited was one of the few companies which remained a zero tax company for long period of time. In the year 1996-97 (just preceding the year from which MAT was applicable) Reliance Industries Limited paid about Rs 50 crore as income tax which was the first time ever that RIL paid a tax in it’s over 20-year history.

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