Section 115JB – Minimum Alternate Tax (MAT) in India

Section 115JB of Income Tax Act introduced for companies to resolve the problem of huge difference in profits shown in books of Accounts and profit for Income Tax Purpose.

Sometimes companies paid nil or very less tax because of claiming certain exemptions and deductions. But in actual companies are making huge profits.

So, the Government introduces section 115JB in which companies have to pay “Minimum Alternate Tax” on certain conditions.

In the following we have explained in detail about Minimum Alternate Tax under section 115JB:

 

What is Section 115JB of Income Tax Act?

Section 115JB of Income tax Act, introduces a concept of Minimum Alternate Tax (MAT) for those companies who show higher profits in books of accounts.

But for Income tax purposes companies reduce their higher profits into very low profits by taking advantage of various exemptions and deductions and ultimately pay low tax.

Under this section companies have to pay a fixed percentage of book profits as Minimum Alternate Tax (MAT), irrespective of the fact that their income as per Income Tax provision is less.

Section 115JB is applicable for all companies including foreign companies.

 

How to calculate Minimum Alternate Tax (MAT) under Section 115JB?

As per Section 115JB, companies have to pay a fixed percentage of book profit as Minimum Alternate Tax (plus surcharges and cess as applicable).

MAT Tax rate @15% is applicable w.e.f. AY 2020-21 (@18.5% before AY 2020-21)

If unit is located in an IFSC and its income is solely in foreign exchange then MAT rate is 9% instead of 15%.

Companies have to pay tax, higher of the following two:-

• Tax as per normal provisions of income tax (i.e. by applying tax rate of 30% (25% in case turnover is upto Rs. 400 crores) plus surcharge (if any) plus cess after claiming various exemptions and deductions)
• Tax as per MAT provision (i.e. Flat tax rate of 15% on book profits plus surcharge (if any) plus cess)

Book profit is the profits calculated as per MAT provisions under Section 115JB by giving effect with some additions or deductions from net profit. It will be discussed in detail later in the article.

Example

ABC Ltd shows profit as per Income Tax provision of Rs. 40 Lacs but after checking of books of account by CA as per MAT under section 115JB its book profits increase to Rs. 90 Lacs.

Then the company has to pay higher of the following:

Tax as per normal provision of income tax

Rs. 40 Lacs * 30% = Rs. 12 Lacs

Rs. 12 Lacs + 4% cess = Rs. 12.48 Lacs

 

Tax as per MAT provisions

Book Profit * 15%

Rs. 90 Lacs * 15% = Rs. 13.50 Lacs

Rs. 13.50 Lacs + 4% cess = Rs. 14.04 Lacs

So higher of the above two is Rs. 14.04. Therefore ABC ltd has to pay tax of Rs. 14.04.

 

What is the meaning of book profits under section 115JB?

Minimum Alternate Tax (MAT) is a percentage of book profit, which a company has to pay if tax as per book profit is higher than tax computed as per normal income tax provisions.

For the purpose of computing MAT, you need to know how to compute book profits which are explained in the following paragraphs.

 

What are the items to be added while calculating Book Profits under Section 115JB?

Following are some items which you have to add to the net profit as per profit and loss A/c. Items to be added only if that item is debited in profit and loss A/c. If items are not debited then no need to add such items to net profit.

For computing book profit we have to add or less as per the items mentioned below. No other items except given in list below to be added or less.

Point to be noted: For the purpose of computing book profit, Net profit is taken as per Company Act not as per Income Tax.

Items to be added to net profits

• Any reserve created (other than related to shipping business under Section 33AC) and any revaluation reserve related to revalued assets. It means any amount transfer to any reserve account (general or specific)
• Any amount standing in revaluation reserve related to revalued asset, if not credited to profit and Loss A/c.
• Expenditure related to exempt income under section 10 (except covered under section 10(38)),11,12
• Dividend paid or proposed dividend.
• Depreciation debited to P&L account (as per companies act).
• Income tax paid or payable (includes interest on Income Tax, DDT, surcharge, cess)
• Provision of income tax.
• Any deferred tax or provision thereof.
• Losses of Subsidiary company.
• Provision for loss of subsidiaries and any provision for diminution of asset (e.g. provision for bad debts) and other provisions for unascertained liabilities / contingent liability if any (except provision related to scientific purpose)
• Expenditure on income accruing or arising to foreign companies from capital gain arising on transactions in securities, or Interest, royalty or fees for technical services if tax rate on above income is less than MAT rate is 15%
• Expenses related to share in the income of AOP/BOI.
• Any expenditure on income arises by way of royalty in respect of patents chargeable to tax under section 115BBF.
• Any notional loss on exchange of SPV with units of business trust.
• Any actual gain on transfer of units of business trust.

 

What are the items to be deducted while calculating book profit under Section 115JB?

For computing book profit under Minimum Alternate Tax, following items should be deducted from net profit, if the same is credited to profit and Loss Account. If following items are not credited to profit and Loss A/c then there is no need to deduct such amount from net profit.

Items to be deducted from net profits

• Income covered under section 10 (except under section 10(38)), section 11 or section 12.
• Any withdrawal from reserve or provisions
• Any amount withdraws from revaluation reserve and credited to profit and loss account to the extent of depreciation for the purpose of revaluation of asset.
• Deferred tax
• Brought forward loss or unabsorbed depreciation whichever is less must be deducted.
• Brought forward loss and unabsorbed depriciation (in total full amount) if it is in relation to an application of corporate insolvency resolution process has been admitted for company or an application moved by central government under section 241 of Companies Act 2013.

        Point to be noted: we have to follow either one of the above points of brought forward loss or unabsorbed deprecation. If it is in relation to application of CIRP or under section 241 of Companies act then follow the above otherwise we have to take brought forward loss or unabsorbed depreciation whichever is lower.

• Income accruing or arising to foreign companies from capital gains arising on transaction of securities, or Interest, royalty or fees for technical services if tax rate on above income is less than MAT rate i.e. 15%.
• Any notional gain or exchange of SPV with units of business trust.
• Any actual loss on transfer of units of business trust.
• Income arises by way of royalty in respect of parents chargeable to tax under section 115BBF.
• Depreciation should be deducted from net profit (excluding depreciation on revaluation of asset).
• Profit of Sick Industrial Company.
• Income of share in Income of AOP/BOI.

  

How to compute MAT in case of companies following IND-AS?

If Company is following IND-AS then apart from above we have to add/less some additional points.

Firstly take Book profit (after add/less adjustments as stated in above paras), then do the following adjustments:

ADD:

• Items credited to other comprehensive income (OCI) and not reclassified to statement of Profit or loss.

        Point to be noted: If there is revaluation surplus from asset as per IND AS 16 and 38 or if there is gain or loss from equity instrument investment at fair value through OCI as per IND AS 109, then that should not be added because these are notional. It is to be added when actually asset is disposed.

• Actual Gain (not notional) on change in fair value of equity instrument through OCI and revaluation surplus from assets on retirement, disposal realization or transfer.
• As per IND AS 10 amount debited to statement of P&L on distribution of Non-Cash assets to shareholders in demerger.
• One-fifth of transition amount.

LESS:

• Items debited to other comprehensive income (OCI) and not reclassified to statement of Profit or loss.

        Point to be noted: If there is revaluation surplus from asset as per IND AS 16 and 38 or if there is gain or loss from equity instrument investment at fair value through OCI as per IND AS 109, then that should not be less because these are notional. It is to be less when actually asset is disposed.

• Actual loss (not notional) on change in fair value of equity instrument through OCI and revaluation surplus from assets on retirement, disposal realization or transfer.
• As per IND AS 10 amount credited to statement of P&L on distribution of Non-Cash assets to shareholders in demerger.
• One-fifth of transition amount.

 

Note: Meaning of transition amount:- amount adjusted in other equity (excluding security premium reserve and capital reserve) on convergence date of IND AS. But transition amount does not include the following:

• Revaluation surplus as per IND AS 16 and 38 adjusted on date of convergence.
• Gain or loss from equity instrument investment at fair value through OCI as per IND AS 109 adjusted on date of convergence.
• On convergence date any amount adjusted to OCI which shall be subsequently re-classified to P&L
• Any adjustments relating to PPE and intangible assets recorded at fair value as deemed cost adjusted on date of convergence.
• Any adjustments related to investments in subsidiaries, joint ventures and associates recorded at fair value as deemed cost adjusted on date of convergence.
• Any adjustments related to cumulative translation difference of foreign operation on date of convergence.

 

What is MAT credit under section 115JAA of Income Tax?

Under section 115JAA, MAT credit means a credit which the company can claim from the payment of excess MAT tax deposited in earlier years over the normal tax provision.

If a company pays tax as per MAT rate then excess tax paid over tax as per normal provision of tax is considered as MAT credit.

Example

In the earlier example tax as per normal provision of tax is Rs. 12.48 Lacs and tax as per MAT provision is Rs. 14.04 Lacs.

So ABC ltd has to pay tax higher of the above i.e. Rs. 14.04 Lacs.

Now excess tax paid Rs. 1.56 Lac (14.04 Lac - 12.48 Lac) is considered as MAT credit.

Now suppose, in the next F.Y. ABC ltd Tax as per normal provision of tax is Rs. 2 Lac and as per MAT is Rs. 1 Lac. ABC ltd is liable to pay Rs. 2 Lac (i.e. as per normal provision).

Now in this case, MAT credit can be utilized and ABC ltd have to pay tax only Rs. 0.44 Lac (Rs. 2 Lac – Rs. 1.56 Lac).

 

Important Point to be noted:

• No interest is received on MAT credit from government
• MAT credit can be carried forward for 15 assessment years immediately succeeding the assessment years in which such credit becomes allowable.
• MAT credit should be allowed to claim only in the year in which company becomes liable to pay tax as per normal tax provision (in case when tax as per normal provision is higher than MAT provision)
• Interest under section 234A, 234B and 234C is continued to be applicable in case of MAT.
• Company shall take report from the Chartered Accountant in form-29B. In this report, CA certifies books profit computed in accordance with provision of section 115JB and furnishes such report along with filing of ITR.
• MAT credit should be computed after considering Foreign Tax Credit.

 

Summary

Section 115JB of Income Tax Act prescribes the flat rate of tax @15% under “Minimum Alternate Tax- MAT” which every company has to pay if the same tax is higher than tax computed as per normal provision of income tax.

In such a way this section resolves the issue related to difference in income computed as per income tax purpose and income shown in books.