Can a company reduce its net tax to zero using tax benefits?
Section 115JB of the Income Tax Act introduced the concept of Minimum Alternate Tax (MAT) in 1987 to prevent companies from taking advantage of various income tax deductions and exemptions. The Government introduced this due to the increase of many ‘zero-tax companies’.
Before Section 115JB, many companies that made huge profits and distributed considerable dividends paid little to no tax. Now, all companies have to pay a fixed percentage of their earnings as minimum tax.
Let us look at the provisions under Section 115JB.
Under Section 115JB, all companies (both domestic and foreign) are required to pay a minimum tax at a fixed rate plus surcharge and cess. According to the concept of MAT, a company’s tax liability will be the higher of the following:
For companies that are a part of an International Financial Service Centre and derive their entire income from convertible foreign exchange, the MAT rate is 9%. Surcharge and cess are also applicable on income tax.
Note that the MAT rate was 18.5% before 20 September 2019, after which the Finance Ministry decided to slash rates as tax relief for companies availing tax exemptions/incentives.
Also read: Section 194D of Income Tax Act
Section 115JB is applicable to every company registered in India, whether they are public, private, foreign or domestic. From 2011, it is also applicable for those earning profits in SEZs (Special Economic Zones).
Every company has to furnish a report from a Chartered Accountant (CA) stating that it has calculated book profits u/s 115JB. Under Schedule III of Companies Act 2013, they also have to prepare profit and loss statements for the previous year for taxation purposes.
Furthermore, companies are required to pay advance tax in some instances and penalty if they do not file ITR on time. The amount of income tax chargeable includes:
The meaning of book profits under Section 115JB is provided by Explanation 1 in sub-section 2 of Section 115JB of the Income Tax Act. According to this, book profits are the actual profits adjusted against liabilities as shown in a company’s profit and loss statement of the previous year. Certain items prescribed in Schedule III of the Companies Act 2013 increase or decrease the net profits. This includes positive adjustment items which increase the net profits and negative adjustments which are deducted from it.
These are debited to profit and loss accounts for the relevant assessment year.
Besides these, expenditure on incomes under Section 10 (other than Clause 38), Section 11, and Section 12 increases the book profits. These include the following:
The following amounts are deductions from the profit and loss statements:
Also read: Section 12A of Income Tax Act
Under Section 115JB of the Income Tax Act, Minimum Alternate Tax (MAT) was introduced to reduce the gap between book profits and income tax calculations. Companies have to pay a minimum tax at 15% of their book profits even after all eligible tax benefits. However, you can carry forward tax credit for 15 assessment years to reduce your tax burden.
When is MAT credit under Section 115JB?
It refers to the difference between the MAT amount paid by a company and tax liability under normal situations. When a company pays tax over the standard computation, it can carry forward the extra amount in subsequent years.
What are the features of MAT credit u/s 115JB?
You can carry forward MAT credit for 15 assessment years following the year in which you incurred it. The Income Tax Department pays no interest on such credit. You can set off MAT credit only in a year in which tax is payable on overall income under normal provisions of ITA.
Do companies have to furnish reports from Chartered Accountants?
Yes, as per provisions of Section 115JB, companies opting for MAT need to obtain a report from a CA in Form 29B. It needs to certify that the book profits were calculated as per provisions of Section 115JB.
What are the MAT norms for companies facing liquidity issues?
Companies facing liquidity issues under the Insolvency and Bankruptcy Code, 2016 are allowed some rebates for the calculation of MAT. These companies can get a reduction on the total amount of unabsorbed depreciation and carry forward losses, which would reduce their book profits.
What is the difference between MAT and AMT?
MAT levies a minimum tax rate of 15% for domestic and foreign companies registered in India. On the other hand, AMT (Alternative Minimum Tax) applies for all taxpayers, including individuals, HUF (Hindu Undivided Family), AOP and BOI with income above Rs. 20 lakh.
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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
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