Minimum Alternative Tax (MAT) and its computation of book profit and MAT credit under section 115JB of Income Tax Act, 1961

1. Introduction

The Minimum Alternative Tax (MAT) is a provision introduced in direct tax laws to limit the tax deductions/exemptions otherwise available to taxpayers so that they pay a ‘minimum’ amount of tax to the government. Due to increase in the number of zero tax paying companies, MAT was introduced by the Finance Act, 1987 with effect from assessment year 1988-89. Later on, it was withdrawn by the Finance Act, 1990 and then reintroduced by Finance (No. 2) Act, 1996, wef 1-4-1997. In India, when applied to companies, AMT is termed the Minimum Alternate Tax (MAT), operating with a “MAT credit” carry forward mechanism. This allows a company to carry forward the “excess” tax it pays because of MAT (as against its regular tax liability) in a particular year, to be utilized in a future year as a credit against its regular tax liability.

2. Objectives of MAT

The objective of introduction of MAT is to bring into the tax net “zero tax companies” which in spite of having earned substantial book profits and having paid handsome dividends, do not pay any tax due to various tax concessions and incentives provided under the Income-tax Law.

3. MAT Rate

As per Section 115JB, every taxpayer being a company is liable to pay MAT, if the Income-tax (including surcharge and cess) payable on the total income, computed as per the provisions of the Income-tax Act in respect of any year is less than 18.50% of its book-profit + surcharge (SC) + health & education cess.

(Note1:-On 20-Sep-2019 Finance Minister slashed MAT rate to provide relief to companies which continue to avail exemptions/incentives, the government has reduced the rate of Minimum Alternate Tax or MAT to 15%, from 18.5%)

(Note2:- MAT is levied at the rate of 9% (plus surcharge and cess as applicable) in case of a company, being a unit of an International Financial Services Centre and deriving its income solely in convertible foreign exchange)

4. Applicability of MAT provisions

As per Section 115JB. (1) Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee, being a company, the income-tax, payable on the total income as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 2012, is less than eighteen and one-half per cent of its book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of income-tax at the rate of eighteen and one-half per cent.

(2) Every assessee,—

(a) being a company, other than a company referred to in clause (b), shall, for the purposes of this Section, prepare its statement of profit and loss for the relevant previous year in accordance with the provisions of Schedule III to the Companies Act, 2013 (18 of 2013); or

(b) being a company, to which the second proviso to sub-Section (1) of Section 129 of the Companies Act, 2013 (18 of 2013) is applicable, shall, for the purposes of this Section, prepare its statement of profit and loss for the relevant previous year in accordance with the provisions of the Act governing such company:

From the above it can be observed that the provisions of MAT are applicable to every company whether public or private and whether Indian or foreign.

5. Non-Applicability of MAT provisions

As per Explanation 4 to Section 115JB as amended by Finance Act, 2016 with retrospective effect from 1/4/2001, it is clarified that the MAT provisions shall not be applicable and shall be deemed never to have been applicable to an assessee, being a foreign company, if—

[As amended by Finance (No. 2) Act, 2019]

i. the assessee is a resident of a country or a specified territory with which India has an agreement referred to in sub-Section (1) of Section 90 or the Central Government has adopted any agreement under sub-Section (1) of Section 90A and the assessee does not have a permanent establishment in India in accordance with the provisions of such agreement; or

ii. the assessee is a resident of a country with which India does not have an agreement of the nature referred to in clause (i) and the assessee is not required to seek registration under any law for the time being in force relating to companies.

Further, as per Explanation 4A to Section 115JB as inserted by Finance Act, 2018, MAT provisions shall not be applicable to a foreign company, whose total income comprises of profits and gains arising from business referred to in Section 44AB, 44BB, 44BBA, or 44BBB and such income has been offered to tax at the rates specified in those Sections.

As per Section 115JB (5A) MAT shall not apply to any income accruing or arising to a company from life insurance business referred to in Section 115B. Further, as per provisions of Section 115V-O the provisions of MAT will not apply to a shipping income liable to tonnage taxation, i.e., tonnage taxation scheme as provided in Section 115V to 115VZC.

6. Computation of Book Profit as per MAT provisions

As per Explanation 1 to Section 115JB(2) “book profit” for the purposes of Section 115JB means net profit as shown in the statement of profit and loss prepared in accordance with Schedule III to the Companies Act, 2013 as increased and decreased by certain items prescribed in this regard. The items to be increased and decreased are as follows:

(A). Positive Adjustment: Amount to be Added Back if Debited to Profit and Loss Account:

  1. Income-tax paid or payable and the provisions Income-tax including education cess, interest, dividend distribution tax (DDT) under the Income-tax Act, 1961.
  2. Amounts carried to any reserves, by whatever name called
  3. Amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities
  4. Amount by way of provision for losses of subsidiary companies
  5. Amount or amounts of dividends paid or proposed
  6. Amount of expenditure relatable to certain incomes (if such income is not subject to minimum alternate tax)
  7. Amount of Depreciation debited to Profit & Loss A/C
  8. Amount of deferred tax and the provisions therefor and the amount or amounts set aside as provision for diminution in the value of any asset.
  9. Amount standing in revaluation reserve relating to revalued asset on the retirement or disposal of such asset
  10. Amount of income/loss in the case of units referred to in Section 47(xvii)

(B). Negative Adjustments -Amount to be Deducted from Net Profit:

  1. Amount withdrawn from reserves or provisions, if any such amount is credited to the profit and loss account.
  2. Income exempt from tax :

The following income, if credited to profit and loss account, shall be deducted—

  1. long-term capital gain exempt under Section 10(38);
  2. income exempt under other clauses of Section 10;
  3. income exempt under Sections 11 and 12;
  4. share of profit from an AOP on which no income-tax is payable in accordance with the provisions of Section 86 (applicable from the assessment year 2016-17);
  5. (in the case of a foreign company) interest, royalty or technical fees chargeable to tax under Sections 115A to 115BBE, or capital gain arising on transactions in securities, if income-tax payable in respect of these incomes under normal provisions (other than provisions governing MAT) is less than the rate of MAT (applicable from the assessment year 2016-17); and
  6. Royalty in respect of patent chargeable to tax under Section 115BBF.
  7. Depreciation (other than because of revaluation of assets) debited to profit and loss account (applicable from the assessment year 2007-08 onwards)
  8. Amount withdrawn from revaluation reserve credited to profit and loss account to the extent it does not exceed the amount of depreciation on account of revaluation of assets [applicable from the assessment year 2007-08].
  9. Aggregate amount of unabsorbed depreciation and loss brought forward in case of a company against whom an application for corporate insolvency resolution process has been admitted by the Adjudicating Authority under Section 7/9/10 of the Insolvency and Bankruptcy Code (applicable from the assessment year 2018-19)
  10. Amount of loss (before depreciation) brought forward or unabsorbed depreciation, whichever is less, as per books of account [not being a company which is covered by Item 12A (supra)]
  11. Amount of profit eligible for deduction under Sections 80HHC, 80HHE and 80HHF
  12. Profit of sick industrial unit
  13. The amount of deferred tax, if any such amount is credited to the profit and loss account.
  14. Amount of income/loss in the case of units referred to in Section 47(xvii)

7. MAT Credit

As discussed in earlier part, a company has to pay higher of normal tax liability or liability as per MAT provisions. If in any year the company pays liability as per MAT, then it is entitled to claim credit of MAT paid over and above the normal tax liability in the subsequent year(s).The provisions relating to carry forward and adjustment of MAT credit are given in Section 115JAA.

Provided that where the amount of Foreign Tax Credit “FTC” (i.e. Income Tax paid in any country outside India) allowed against the MAT exceeds the amount of such FTC admissible against the tax payable by the assessee under normal provisions of the Income-Tax Act, then, while computing the amount of FTC under this sub-Section, such excess amount shall be ignored.

8. Carry forward and adjustment of MAT credit

The credit of MAT can be utilized by the company in the subsequent year(s). The credit can be adjusted in the year in which the liability of the company as per the normal provisions is more than the MAT liability. The set off in respect of brought forward MAT credit shall be allowed in the subsequent year(s) to the extent of the difference between the tax on its total income as per the normal provisions and as per the MAT provisions.

As discussed earlier, the company can carry forward the MAT credit for adjustment in subsequent year(s), however, the MAT credit can be carried forward only for a period of 15 years after which it will lapse.

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