Section 115JB: Minimum Alternate Tax (MAT) for Companies

Introduction to Section 115JB

Section 115JB of the Income Tax Act, 1961, introduces the concept of Minimum Alternate Tax (MAT) for companies. This provision was enacted to ensure that profitable companies, which may otherwise pay very little or no tax due to various exemptions, deductions, and incentives available under the normal provisions of the Act, pay a minimum amount of tax to the government. It acts as a safety net to broaden the tax base and ensure equity in taxation.

For example: A company might show a high profit of ₹100 Crores in its financial statements (as per the Companies Act), but due to accelerated depreciation allowances or specific tax holiday deductions permitted under the Income Tax Act, its taxable income under normal provisions could be reduced to just ₹5 Crores. Without MAT, the company would pay very little tax despite being highly profitable. Section 115JB aims to prevent such a scenario.

Applicability of Section 115JB

Section 115JB is applicable to all companies, whether domestic or foreign, deriving income from India. A company becomes liable to pay MAT if the income tax payable on its total income, calculated as per the normal provisions of the Income Tax Act, is less than the MAT payable on its book profit.

In such a scenario, the income tax payable for the relevant previous year shall be the MAT calculated on its book profit. If the normal tax liability is higher than the MAT, then the normal tax liability is paid.

Computation of Minimum Alternate Tax (MAT)

The computation of MAT involves determining the 'book profit' and then applying the prescribed MAT rate. The steps are as follows:

1. Ascertaining Book Profit:

Book profit is the net profit as shown in the company's statement of profit and loss, prepared in accordance with Schedule III to the Companies Act, 2013 (or relevant accounting standards for foreign companies). This net profit is then adjusted by making specific additions and deductions as per Explanation 1 to Section 115JB. Common adjustments include:

• Additions:
  • Income tax paid or payable and the provision therefor.
  • Amounts carried to any reserves.
  • Provisions for unascertained liabilities.
  • Provision for diminution in the value of any asset.
  • Depreciation debited to the profit and loss account (if more than the amount as per WDV method).
  • Deferred tax and provision for deferred tax.
  • Income exempt under Sections 10, 11, 12 (if credited to P&L, then it's reduced later).
• Deductions:
  • Amount of depreciation (other than due to revaluation of assets).
  • Amount of income exempt under various sections (e.g., Section 10, 11, 12, etc.), if credited to the profit and loss account.
  • Profits from certain foreign projects, if included in book profit.
  • Amount of deferred tax credited to the profit and loss account.

Example of Book Profit Adjustment:
Suppose a company has a Net Profit as per its Profit & Loss A/c of ₹500 Lakhs. Its tax accountant identifies the following:
- Provision for Income Tax: ₹100 Lakhs (to be added back)
- Transfer to General Reserve: ₹50 Lakhs (to be added back)
- Exempt Dividend Income from an Indian company (credited to P&L): ₹20 Lakhs (to be deducted)

Calculation of Adjusted Book Profit for MAT:
Net Profit as per P&L: ₹500 Lakhs
Add: Provision for Income Tax: + ₹100 Lakhs
Add: Transfer to General Reserve: + ₹50 Lakhs
Less: Exempt Dividend Income: - ₹20 Lakhs
Adjusted Book Profit for MAT: ₹630 Lakhs

2. Application of MAT Rate:

Type of Company / Income	MAT Rate (on Book Profit)
All other companies	15% (plus applicable surcharge and cess)
Companies located in an International Financial Services Centre (IFSC) earning specified income (e.g., from convertible foreign exchange)	9% (plus applicable surcharge and cess)

Example of MAT Calculation and Comparison:
Let's continue with the example of the company with Adjusted Book Profit of ₹630 Lakhs.
- Assume the normal corporate tax rate is 25%.
- Assume the company's taxable income as per normal provisions (after all deductions) is ₹80 Lakhs.

Normal Tax Liability: ₹80 Lakhs @ 25% = ₹20 Lakhs
MAT Liability: ₹630 Lakhs @ 15% = ₹94.5 Lakhs

Since MAT Liability (₹94.5 Lakhs) is higher than Normal Tax Liability (₹20 Lakhs), the company will pay ₹94.5 Lakhs as tax for the year.

MAT Credit (Section 115JAA)

A significant feature linked to MAT is the concept of MAT Credit, governed by Section 115JAA. When a company pays tax as per MAT (i.e., MAT liability is higher than its normal tax liability), the **excess amount** of MAT paid over the normal tax payable is allowed as MAT Credit. This credit can be carried forward for a period of **15 assessment years** immediately succeeding the assessment year in which the credit became due.

The carried forward MAT credit can be set off against the tax payable in any subsequent year when the normal tax liability of the company is **higher** than its MAT liability. The amount of set-off is limited to the difference between the normal tax liability and the MAT liability of that subsequent year.

Example of MAT Credit Utilization:
Continuing the previous example, the company paid ₹94.5 Lakhs (MAT) instead of ₹20 Lakhs (Normal Tax).
MAT Credit Generated: ₹94.5 Lakhs - ₹20 Lakhs = ₹74.5 Lakhs.

Now, consider the next financial year:
- Normal Tax Liability for the next year: ₹150 Lakhs
- MAT Liability for the next year: ₹60 Lakhs

Since Normal Tax (₹150 Lakhs) is higher than MAT (₹60 Lakhs), the company would normally pay ₹150 Lakhs. However, it can utilize its MAT Credit.
Maximum MAT Credit that can be set off: Normal Tax - MAT = ₹150 Lakhs - ₹60 Lakhs = ₹90 Lakhs.

Since the available MAT Credit (₹74.5 Lakhs) is less than the maximum allowable set-off (₹90 Lakhs), the company can fully utilize ₹74.5 Lakhs of its MAT credit.

Actual Tax Payable for the next year: Normal Tax - MAT Credit utilized = ₹150 Lakhs - ₹74.5 Lakhs = ₹75.5 Lakhs.
In this case, the entire MAT Credit is utilized, and there is no balance to carry forward.

Key Features and Exemptions/Limitations

• Exclusions from MAT: Certain incomes and entities are specifically excluded from the purview of MAT. For instance, income taxable under specific provisions for non-residents like Section 115AC or Section 115AD (for FIIs/FPIs not having a Permanent Establishment in India) are generally exempt from MAT computation. Also, life insurance companies and shipping companies opting for tonnage tax scheme are exempt.
• Reporting Requirement: Every company liable to MAT must furnish a report in **Form 29B** from an accountant, certifying that the book profit has been computed in accordance with the provisions of Section 115JB. This report must be submitted along with the income tax return.
• Foreign Companies: Foreign companies are also subject to MAT, but their book profit calculation typically relies on the financial statements prepared as per the accounting standards in their country of incorporation, subject to specific adjustments.

Importance of Section 115JB

Section 115JB plays a critical role in the Indian tax landscape by ensuring that corporations, despite having significant accounting profits, do not escape the tax net entirely. It addresses the issue of "zero tax companies" by ensuring a minimum contribution to the revenue. This provision enhances tax equity, strengthens government finances, and provides a level playing field among different businesses by preventing aggressive tax planning that might otherwise lead to negligible tax payments.