In this blog post, Neha Patankar, a second-year student at Bharti Vidyapeeth, Pune and pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, discusses the applicability of MAT in domestic companies.

Introduction

Albert Einstein has rightly said that “The hardest thing in the world to understand is Income Tax”. It is because of its complicated provisions which take both time and effort to understand. It can theoretically be understood with a help of someone but when its application is concerned, it seems hard. Furthermore, to understand tax it is broadly classified into two types namely: Direct Tax and Indirect Tax.

Direct tax in lay terms is a tax on income that you have to pay; it cannot be shifted to others. In other words, direct taxes are those taxes which are directly levied on individuals, corporations and organisations and collected by way of income tax returns to be filed each year. Some of its forms include income tax, wealth tax, minimum alternate tax etc.

An Indirect Tax is collected by an intermediary (such as a retail store) from the person who bears the ultimate economic burden of the tax (such as the customer). Indirect taxes include sales tax, service tax, value-added tax, commodity transaction tax and securities transaction tax among others. Henceforth, in this article, we will understand on such kind of Direct Tax that is Minimum Alternative Tax and its compliance in domestic companies. “Domestic Company” means an Indian Company which in respect of its income liable to tax under the Act, has made prescribed arrangement for declaration and payment of dividends within India in accordance with the Section 194. Then, an Indian Company will be declared as a domestic company.

In order to become a domestic company, it is essential that the said other company may have made the prescribed arrangements for declaration and payments within India of dividends out of such income. Therefore, tax paid by the companies are not sufficient as most of the profits were given to the shareholders, further showing fewer returns on income causing to make changes in the Act.

Need for Minimum Alternative Tax (MAT)

In the past, a large number of companies showed book profits on their profit and loss account and at the same time distributed huge dividends. However, these companies didn’t pay any tax to the government as they reported either nil or negative income under provisions of the Income-Tax Act. These companies were showing book profits and declaring dividends to their shareholders but were not paying any tax. These companies are popularly known as ‘zero tax’ companies.

The Indian Income-Tax Act allows a large number of exemptions from total income. Besides exemptions, there are several deductions permitted from the gross total income. Further, depreciation allowable under the Income-Tax Act is not the same as required under the Companies Act. The latter provides a lower rate namely, the I-T Act which computes a higher rate of depreciation.

The result of such exemptions, deductions, and other incentives under the Income-Tax Act in the form of liberal rates of depreciation is the emergence of zero tax companies, which in spite of having high book profit are able to reduce their taxable income to nil. In order to bring such companies under the I-T net, Section 115JA was introduced from the assessment year 1997-98. Now, all companies having book profits under the Companies Act shall have to pay a minimum alternate tax at 18.5%.

Minimum Alternate Tax (MAT)

One such tax is the minimum alternate tax (MAT). Generally, a company is liable to pay tax on the income computed in accordance with the provisions of the Income-Tax Act, but the profit and loss account of the company is prepared as per provisions of the Companies Act.

Section 115J regulates the provisions regarding Minimum Alternative Tax. Up to the assessment year 2001-02, these provisions were covered by Section 115JA, stating that if income of a company (maybe Indian or Foreign) under normal provisions is lower than 30 percent of “book profit” shall be deemed as total income of the company whereas Section 115JB talks about the assessment year 2001-02 onwards which says that if tax liability of a company (maybe Indian or Foreign) under normal provision is lower than 18.5 percent of book profit should be deemed as tax liability.

What is Book Profit?

Book profit is basically net profit as per profit and loss account. For this purpose, profit and loss account should be prepared within the parameters of Schedule VI to the Companies Act, 1956. However Finance Act, 2012 has made special provisions for banking, insurance and electricity companies.

Different benches of Tribunal held that MAT provisions are not applicable in the case of insurance, banking and electricity companies. This is so because book profit is calculated by making few adjustments in net profit disclosed under the profit and loss account prepared by the company in accordance with the Schedule VI of the Companies Act, 1956 which doesn’t include the above-mentioned companies. Therefore, an amendment was made under the Finance Act, 2012 with effect from the assessment year 2013-14 to align the provisions of Income Tax Act with the Companies Act,1956.

Thus the amended version of Section 115JB provides that the book profit in the case of:

1. Any insurance or banking company or any company engaged in the generation or supply of electricity or any company as specified under the Act shall be calculated on the basis of profit and loss account prepared in accordance with the provisions of their regulatory Acts. These companies have an option to prepare profit and loss account either in accordance with the provision of Schedule VI to the Companies Act or in accordance with the provisions of the Act governing such companies, or
2. Any other company shall be calculated on the basis of profit and loss account prepared in accordance with Schedule VI of the Companies Act, 1956.

For computing the book profit, the net profit should be increased by the following amounts if debited to the profit and loss account. However, Depreciation debited to profit and loss account shall be added back. Thereby, depreciation (not being depreciation which arises because of revaluation of assets) shall be deducted. The cumulative impact of the addition and deduction is that book profit will be increased by depreciation (pertaining to the revaluation of assets). Some relief is available if there is a withdrawal from the revaluation reserve account and it appears on the credit side of profit and loss account.

Assessing Officer’s Power to Alter Net Profit

Only in the following two cases, the assessing officer can rewrite the profit and loss account:

• If profit and loss account is not prepared according to Companies Act- It is observed that the profit and loss account is not drawn up in accordance with the provisions of Part II and III of the Sixth Schedule of the Companies Act, the Assessing Officer can recalculate the net profit.

• In a case where there is no allegation of fraud and misrepresentation but only a difference of opinion as to the whether a particular amount should be properly shown in the profit and loss account or in the balance sheet, the provisions of Section 115JB do not empower the Assessing Officer to disturb the profit as shown to the assessee.

• If accounting policies, accounting standard or rates or method of Depreciation are different- According to the first proviso to section 115JB(2) the accounting policies, the accounting standards adopted for preparing such accounts, the method and rates of depreciation which have been adopted for preparation of the profit and loss account laid before the annual general meeting, should be followed while preparing profit and loss account for the purpose of computing book profit under Section 115JB.

• In order to prevent the aforesaid practise of following a different financial year and accounting year under the Income Tax Act and Companies Act respectively so as to give higher profits to shareholders and lower profits is disclosed to tax authorities.

• Therefore, it has been provided that accounting policies, accounting standards, depreciation method and rates of depreciation for two sets of account shall be the same.

• In case it’s not so, the Assessing Officer can recalculate net profit after adopting the same as stated above which have been adopted for reporting profit to shareholders.

Companies that are exempted

MAT is a way of making companies pay a minimum amount of tax. It is applicable to all companies except those engaged in infrastructure and power sectors. Income arising from free trade zones, charitable activities, investments by venture capital companies is also excluded from the purview of MAT. However, foreign companies with income sources in India are liable under MAT. Also, the provisions of MAT are not applicable in the following cases;

1. Income from any business or any services in the hands of entrepreneur or developer in a special zone. Time frame when MAT provisions are not applicable (income arising after March 31, 2005, but before April 1, 2011.
2. Income of shipping companies which is subject to provisions of “tonnage income” of Chapter XII-G, time frame when MAT is not applicable is from when Income arising after March 31, 2004 (i.e. the assessment year 2005-2006 onwards)
3. Income which accrues and arises to a company from life insurance business, MAT not applicable when income arising after March 31, 2000 (i.e. the assessment year 2001-02 onwards).

Liability

Under the Income Tax Act, the tax paid under MAT regime can be set off against the liability of subsequent years, through MAT credit allows the tax to carry forward the tax paid as MAT for a period of ten consecutive assessment years from the year in which the MAT was first computed and set-off against the tax liability under the non-MAT provisions of the Income Tax Act. Therefore, The MAT paid can be carried forward and set-off (adjustment) against regular tax payable during the subsequent five-year period subject to certain conditions.