Albert Einstein said that ‘The hardest thing in the world is to understand the Income Tax’. Tax on income can be classified into two Direct tax and Indirect Tax. Direct tax is a tax that is directly levied on the income of an individual, corporation, and organization which has to be paid every financial year. Such tax includes Income tax, wealth tax, etc. While on the other hand, Indirect Tax is a tax that is collected by a mediator such as a retail store from the person who bears the ultimate economic burden of the tax such as the customer. Such taxes include Goods and Services Tax, Entertainment Tax, Excise duty, Custom Tax, etc.
The Minimum Alternate Tax (MAT) is a provision that is brought up in Direct tax laws so as to curb the tax deductions, exemptions that are accessible to taxpayers in order that they pay a ‘minimum’ quantity of tax to the government. Lawmakers discovered that there are several companies that are publishing a large amount of profit within the accounts as laid in the Annual General Meeting (AGM) before the shareholder however at an equivalent time these companies also disclosing nil profit or a little bit above nil for income tax purpose.
Companies have found many different ways to avoid paying income tax by using several exemptions. Companies use such exemptions to defer the payment of income tax and show more profit in their companies’ accounts for putting shareholders’ confidence in the company. To put an end to this Minimum Alternate Tax is introduced to make companies pay a minimum amount of tax and avoid the non-payment of tax by those companies.
The concept of Minimum Alternate Tax (MAT) is governed under the provision of Income Tax Act 1961, and it is a tax levied under section 115JB Chapter Ⅻ of the said Act.
OBJECTIVE of Levying MAT
Government introduces the concept of Minimum Alternate Tax is to target those companies who earn huge amounts of profits and pay a handsome dividend to the shareholders but pay minimal
taxes or no tax to the government by taking advantage of deductions, depreciation, exemptions, etc. benefits under the Income Tax Act 1961.
MAT was introduced by the Finance Act, 1987 with impact from Assessment Year 1988-89. Later on, it had been withdrawn by the Finance Act, 1990 and then reintroduced by Finance Act, 1996, w.e.f. 1 April 1997.
Minimum Alternate Tax was introduced due to the rise in the number of Zero Tax Companies.
Zero Tax Companies are those who show a great profit as per the Companies Act but minimize tax outgo as they display income that is zero or negligible under the provision of the Income Tax Act. Such companies try to evade the paying of taxable liability by availing several deductions and show a huge amount of profit on its company’s book of profit.
MAT was introduced for the sole purpose to get the minimum tax from those companies who usually evade paying the tax by showing zero or negligible income by availing such deductions, exemptions given under the Income Tax Act.
APPLICABILITY OF MAT
According to Section 115JB of the Income Tax Act, MAT is applicable to-
Company whether Private or Public
Foreign companies having a place of Permanent Established or place of Business in India.
Company, being a Unit located in International Financial Service Centre deriving income solely in convertible foreign exchange.
NON APPLICABILITY OF MAT
MAT is not applicable to –
Any Income received by a Company from a Life Insurance Business.
Any Income arises from any business carried on services rendered by an entrepreneur or a developer in a Unit or Special Economic Zones.
Any Foreign companies where the total income of the company comprises solely of profit and gains from a business referred under section 44B or 44BB or 44BBA or 44BBB.
Foreign Companies if
Assesse is a resident of a country or specified territory with which India has Double Taxation Avoidance Agreement (DTAA) and Assesse doesn’t have a Permanent Establishment in accordance with the provision of such agreement. Or
Assesse is a resident of a country with which India Doesn’t have Double Taxation Avoidance Agreement (DTAA) and Assesse is not required to seek registration under any law for time being in force in India.
Section 115JB of The Income Tax Act & its analysis
Section 115JB of the Income Tax Act, where in case the assesse being a company, the income tax payable on the total income as computed under the income tax 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 15% of its BOOK PROFIT, then such book profit shall be deemed to be the total income of the assesse and the tax payable by the assesse on such total income shall be the amount of income tax at the rate of 15%.
As the concept of MAT implies that the tax liability of a company will be higher of the following:
Tax liability of the company is computed as per the normal provisions of the Income-tax Law, which is tax computed on the taxable income of the company by applying the tax rate applicable to the company. Such computation of Tax is called normal tax liability.
Tax computed @ 15% plus surcharge and cess as applicable on book profit the tax computed by applying 15% plus surcharge and cess as applicable on book profit is termed as Minimum Alternate Tax.
This income tax is, further has to be enhanced by surcharge (as applicable) and education cess @ 4%.
In simple words every company shall be liable to pay higher of the following
15% of the Book Profits Or,
Income tax as per normal provision of Income Tax Act 1961
The taxable income of Fairy tail Pvt. Ltd. computed as per the provisions of the Income-tax Act is ₹ 7,60,000. Book profit of the company calculated according to the provisions of section 115JB is ₹ 17,60,000. What will be the tax liability of Fairy Tail Pvt. Ltd. (ignore cess and surcharge)?
The tax liability of a company must be higher of :
Normal tax liability, or
The normal tax rate applicable to an Indian company is 30% (includes cess and surcharge as applicable).
Tax @ 30% on ₹ 7,60,000 will amount to ₹ 2,28,000 (include cess).
Book profit of the company is ₹ 17,60,000. MAT liability (less cess and surcharge) @ 15% on ₹ 17,60,000 will come to ₹ 2,64,000.
Thus, the tax liability of Fairy Tail Pvt. Ltd. will be ₹ 2,64,000 (plus cess as applicable) being higher than the normal tax liability.
In simple terms, book profits refer to money earned by an entity during a financial year by selling products and services deducted by all the expenses incurred during the same financial year.
Book Profit is defined in explanation 1 to section 115JB of Income-tax act 1961 as book profit means the profit as shown in the statement of profit & loss account for the relevant previous year prepared in accordance with the Schedule Ⅲ of the Companies Act 2013, and as increased and decreased by some prescribed items.
To commute the book profits, we have to take net profit as per the statement of profit and loss a/c for the relevant previous year as per section 115JB(2).
The items are deducted from the profit and loss account be added
Profit and Loss Account as Per 115JB(2)
As per subsection 2 of 115JB Every Assesse
Being a company shall for purpose of this section prepare its statement of Profit and Loss Account for the relevant previous year in accordance with Schedule Ⅲ of Companies Act.
Being a company Insurance and Banking for the purpose of this section shall prepare its statement of Profit and Loss Account in accordance with the provision of the act governing such companies.
For the purpose of Book Profit and for the purpose of showing accounts before the company at its AGM, the profit and loss account be prepared while the following must be the same:-
The accounting policies
The accounting standards
The method & rates of depreciation
For calculating the book profit, the profit and loss account be made and the items to be added to Net profit if debited to Profit and Loss Account and the items be deducted if credited to the Profit and Loss Account. Followings are the items as follows:
Additions to the Net Profit
Income Tax already paid or be payable, if any calculated as per provisions of the income tax act.
Transfer made to any reserve
Dividend paid or proposed
Any amount made for Provision for losses for subsidiaries companies
Depreciation includes depreciation on account of revaluation of assets
Provision for deferred tax
Provision for unascertained liabilities
Amount of expense relating to exempt income under sections 10,11,12 (except sec 10AA and 10(38) This means income under section 10AA & long term capital gain exemption under section 10(38) are subject to MAT. Provision made for diminution in the value of any asset
Deductions to the Net Profit
Amount which is withdrawn from any reserves or provisions
The amount of income upon which any of the provisions of sections 10, 11 & 12 applies and income upon which sec10AA & 10(38) of Income Tax applies are exempted.
Amount withdrawn from revaluation reserve to the extent of depreciation on account of revaluation of asset and which has been credited to profit & loss account.
Amount of loss brought forward or unabsorbed depreciation, whichever is less as per the books of account. However, the loss shall not include depreciation.
Amount of Deferred Tax, is any such amount is credited in the profit & loss account
Amount of depreciation debited to the Profit and Loss Account (excludes the depreciation on revaluation of Assets)
MAT credit is a benefit to the companies who pay tax in excess of the normal tax. Any person who pays tax in accordance with section 115JB(1) shall be eligible for MAT credit. MAT credit can be computed as an amount where the MAT of a company is greater than its usual tax liability. Thus, the difference between the MAT and the Normal tax as per normal provision of Income Tax Act is to be called as MAT Credit.
Tax liability of a PQR company for FY 2019-20 as per the normal provisions of the Income Tax Act is ₹ 10 lakh whereas the liability as per the provisions of MAT is ₹ 12 lakh.
In such a case, MAT is higher than the normal tax liability then the company is eligible for MAT Credit as per Section 115JAA.
MAT credit = MAT – Normal Tax Liability
= ₹ 11 lakh – ₹ 10 lakh
= ₹ 1,00,000
In the above example, the amount of MAT credit is ₹ 1 lakh. Whereas the company has to pay a tax of ₹ 10 lakh as per normal provisions of Income Tax but the company has paid ₹ 11 lakh as per the provisions of MAT. The gap of ₹ 1 lakh which is excess from normal tax is MAT credit and such amount can be utilized further as a tax credit in the near future.
MAT credit can be carry forward for the 15 Assessment Year and be utilized as per provision. MAT credit can be utilized in that Assessment year where the Normal Tax is greater than MAT.
It is utilized up to the amount of least of followings
MAT credit available Or,
Normal Tax – MAT
The major source of Revenue for the Government is from Tax and the major amount of tax become from the corporate sector. Before this provision companies were evading the tax, so such provision has to be come. This provision brings a better chance in the taxation world as its main objective is to ensure that every company that is earning huge profits and had the ability to pay taxes should not avoid their tax liabilities.
By Vaibhav Verma, Law Student