Section 115JB Of The Income Tax Act: MAT Provisions, Applicability And Exclusions

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.

Provisions of MAT 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:

• Tax liability as per normal provisions of Income Tax Act computed by applying the tax rate on its taxable income. For companies with gross receipts or turnover of Rs. 400 crores, the tax liability is 25% plus applicable surcharge and 4% cess. 
• Tax is calculated at the rate of 15% along with cess and surcharge on a company’s book profits. 

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

Cases of Applicability of Section 115JB

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:

• Income tax payable as per annual income
• Additional interest charged
• Tax on distributed income u/s 115R or distributed profits u/s 115-O
• Surcharges if applicable
• Health and education cess 
• Secondary and higher education cess (SHEC) 

Exclusions under Section 115JB of the Income Tax Act

• Any Indian company which opted for tax regimes under Section 115BAA or Section 115BAB
• If a taxpayer is a resident of a country having an agreement with India under Section 90(1) or Section 90A(1).
• If the taxpayer does not have a permanent establishment in the country in accordance with the above sections.
• Any shipping company whose income is subject only to taxation of tonnage.
• Companies with income arising out of life insurance business.
• MAT provisions do not apply for foreign companies with income arising from businesses mentioned in Section 44AB, Section 44BB, Section 44BBA or Section 44BBB. 

What Are Book Profits on Which MAT is Calculated?

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.

Positive Adjustment Items for Book Profits

These are debited to profit and loss accounts for the relevant assessment year.

• Amount set aside to meet various liabilities (other than ascertained ones)
• Sum of dividends paid or proposed for payment
• Income tax paid or payable including interest, DDT (dividend distribution tax) and education cess
• Amount of losses of subsidiary companies
• Sum carried to any reserve u/s 33AC
• Adjustment for depreciation debited to profit and loss account
• Revaluation reserve obtained from disposal or retirement of revalued assets
• Amount for diminution of the value of assets
• Deferred tax and its provisions
• Income/loss in case of transfer of share units under Section 47 Clause xvii 

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:

• Capital gains from transactions of securities and interest/fees for technical services for foreign companies
• Expenditure related to incomes of BOI (body of individuals) or AOP (association of persons), which is tax-exempt u/s 86
• Loss on the transfer of capital assets u/s 47
• Expense that is relatable to earnings by way of royalty from patents

Negative Adjustments for Book Profits

The following amounts are deductions from the profit and loss statements:

• Amount of income credited to the P&L statement for which provisions of Section 10, Section 11 and Section 12 are applicable
• Value of depreciation debited from profit and loss accounts
• Sum of withdrawal from any reserve or provisions credited to profit and loss statements
• Income from royalty from patents with applicable tax u/s 115BBF
• Income from a foreign company (including capital gains, interest, royalty or fees 
• Gains from transfer of units as per Section 47
• Gains from transfer of capital assets to a business trust u/s 47
• Notional gain from charges on the carrying amount of share units of an SPV (special purpose vehicle)
• Deferred tax, which is credited to the P&L statement 
• Loss from the transfer of share units referred in Section 47
• Profits of a sick industrial company as long as its net profits become nil
• Amount of losses brought forward or unabsorbed depreciation (whichever is lower)

Also read: Section 12A of Income Tax Act

Final Word

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.

Frequently Asked Questions

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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