Minimum alternate tax
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This article is written by Ankita Tiwari, pursuing a Certificate course in Advanced Corporate Taxation from Lawsikho.com.

Introduction

MAT which stands for Minimum Alternate Tax means a company has to pay a minimum amount of tax even though the statement of accounts of the company shows a nil tax liability. MAT is payable only when the normal tax calculated is less than MAT calculated @15% of book profit. MAT was earlier introduced by Finance Act, 1987 but was later withdrawn and restored by the Finance (No. 2) Act, 1996 under section 115 JB of the Act, to be in effect from 1.04.1997. MAT is only for companies but an identical concept applies to other taxpayers in the form of Alternate Minimum Tax (AMT). MAT was previously levied @18.5% on the book profits but the Finance Act, 2019 amended it to be levied @15% on the book profits w.e.f. 1.4.2020. The exception to the rate of 15% MAT is ‘International Financial Services Centre’ on which the rate of MAT applicable is 9%.[i]

In a pre-MAT scenario, income generated by companies were reduced to ‘zero’ or ‘nil’ by applying various provisions of exemptions, deductions, etc., available under law. For instance, every company draws its statement of accounts as per the Companies Act, 2013. They declare huge profits in the AGM however, when tax is calculated as per the Income Tax Act, 1961 (the Act), it shows loss. Accordingly, the government, in order to prevent it, brought MAT into the picture which brings into the trawl such ‘zero tax companies’ who habitually dodged tax by utilizing various provisions of law.

Calculation of MAT

For the purpose of calculating tax liability for the companies, the higher of the following will be taken:

  • Tax liability computed by applying the normal provisions of Income Tax Act and Companies Act, 2013, or;
  • Tax liability computed @15% + 4% HEC of the book profit.

If later is higher, then it will be paid instead of the former.

For this purpose, it is crucial to understand the calculation of book profits, on the basis of which MAT is calculated. Prior to calculation of book profit, a profit has to be chosen as per statement of profit and loss for relevant previous year. Such statement of profits must be prepared as per Schedule III of the Companies Act, 2013 and be declared in the Annual General Meeting. Companies like Insurance and Banking Companies who are not covered under Schedule III of Companies Act, shall prepare their statement of profits according to the law which governs them.

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Exceptions to MAT

While computing MAT, there are few incomes and expenses prescribed under the Act which fall outside of MAT. Further, if an income has already been included at the time of computing the statement of profits, then it has to be deducted and any such expenses which have been included in the statement of profits has to be added back.

The exceptions to MAT are:

  1. Any foreign company viz., resident of a country with whom India has a Double Taxation Avoidance Agreements (DTAA) and does not have a permanent establishment. Moreover, an exception to this clause is that there are few companies who are resident of a country with whom India does not have a DTAA, yet MAT will not be applicable to them unless they register themselves under any law in India.[ii]
  2. Foreign companies whose total income is taxable solely under PGBP under section 44B, 44BB, 44BBA, 44BBB as they have their own specified rates applicable to them. Section 44B, 44BB, 44BBA, 44BBB deal with computation of profits and gains of shipping business in the case of non-residents, business of exploration etc., of mineral oils, aircraft business and foreign companies engaged in power projects respectively.
  3. Life Insurance companies.
  4. Companies who have exercised their option under section 115BAA and 115BAB.[iii] Section 115BAA and 115BAB deal with tax on profits and gains of domestic companies and new manufacturing domestic companies, respectively.
  5. Income arising under section 10 (other than subsection 38), 11 and 12 of the Act.
  6. Income in the form of share of profit from Association of persons or Body of individuals, if not taxable under section 86 of the Act.
  7. Royalty income under section 115 BBF @ 10%.
  8. Any amount of expenditure on income earned by a foreign company by way of capital gain on sale of securities, royalty, interest or FTS on which tax rate is lower than the rate under section 115JB.

Amounts that have to be added back:

  1. Deferred tax on debit side of statement of profit account.
  2. Depreciation on the debit side.
  3. Income Tax appearing on the debit side of the statement of profits will be added back under section 115 O (1).
  4. Amount carried to any reserve shall be added other than reserve created under section 33AC.
  5. Any amount set aside to meet unascertained liabilities, shall be added.
  6. Amount of dividend shall be added.
  7. Amounts set aside as provision for diminution in value of assets shall be added.
  8. Amount which stands to the revaluation reserve shall be added on retirement of asset.
  9. Any amount as provision for losses of subsidiary company, shall be added.

Amounts that have to be deducted:

  1. Deferred tax on credit side. It denotes deferred tax liability which most commonly arises where depreciation under Income Tax Act is higher than the depreciation which arises under the Companies Act leading to reduction in tax for the current period.
  2. Depreciation on the credit side shall be deducted (other than the revaluation amount). The revaluation amount will be deducted only if the depreciation on revaluation of assets is credited to statements of profits and loss from the Revaluation
  3. Amount withdrawn from reserve if such reserve was created by debiting statement of profits but has now been credited in statement of profits.
  4. Brought forward losses or unabsorbed depreciation, whichever is lower as per books of accounts.
  5. Profits of sick companies.
  6. Aggregate amount of unabsorbed depreciation or losses brought forward, if the company’s or its subsidiary company’s BODs have been suspended by the Tribunal on application of Central Government and new BOD is appointed by the Central government; or a company against whom Corporate Insolvency Resolution Process has been admitted for adjudication under IBC.

The above transactions can broadly be understood to be outside the ambit of MAT as these transactions either have a specified rate, lower than MAT in which case, while applying the higher among the two, every time MAT will be higher or; such transactions have a quashing effect on MAT.

What is MAT credit

MAT credit is available to an assessee company under the provision of section 115JAA of the Act. The companies who pay tax according to section 115JB (1) are eligible for MAT credit.  MAT credit is the amount of difference between the MAT amount paid and the normal tax amount.[iv] For instance, if the tax amount calculated according to the normal provisions of the Act is INR 2 lakhs and the MAT calculated @15% of the book profit is INR 2.5 lakhs, then INR 50,000 which the assessee feels has been paid in excess of taxes calculated as per normal provisions, will be available as MAT credit. MAT credit can be carried forward for 15 succeeding years.[v]

Set-off of losses under MAT

The MAT credit is available in form of a benefit which can be availed in an Assessment Year where normal tax exceeds MAT amount[vi] which can only extend up to the amount of difference between the normal tax and MAT.[vii] Computation of tax on the basis of book profits and carry forward and set-off of business losses and unabsorbed depreciation are independent of each other. Further, carry forward of losses and unabsorbed depreciation under the normal provisions of the Act are computed as per the provisions of Income-tax Act. Whereas, the carry forward of business losses and unabsorbed depreciation for the purposes of book profits are as per the books of account of the assessee company.

Credit of MAT can be availed at the time when normal tax is greater than MAT. Amount of Credit which can be availed will be least of the following:

  • Total amount of MAT credit available, or;
  • Difference of normal tax and MAT for the current year (year in which normal tax is higher than MAT).

For instance:

S. No.

Particulars

Year 1

Year 2

Year 3

A.

MAT @ 15% + 4% HEC

INR 3,00,000/-

INR 4,00,000/-

INR 5,00,000/-

B.

Normal Tax

INR 2,00,000/-

INR 2,50,000/-

INR 6,00,000/-

C.

Tax Payable (Higher amongst A and B)

INR 3,00,000/-

INR 4,00,000/-

INR 6,00,000/-

D.

MAT credit (Difference of A and B)

INR 1,00,000/-

INR 1,50,000/-

INR 1,00,000/- (MAT Credit availed as normal tax is higher)

Net tax payable will be INR 4,00,000/- as MAT credit benefit upto INR 1,00,000/- can be availed. After availing the benefit, MAT credit will stand at INR 1,50,000/-

Important cases

In the case of Commissioner of Income Tax v. Union of India and Others, the HC of Bombay decided on the issue whether banking companies are covered under the section 115JB of the Act. On the basis of legislative amendment in Finance Act, 2012, the HC held that section 115JB (2) of the Act did not apply to banking companies prior to the 2012 Amendment. However, the amendment has now bifurcated sub-section 2 of section 115JB into two clauses. Clause (a) deals with companies other than the companies mentioned in clause (b). Clause (b) applies to companies covered under section 129 (1) of the Companies Act, 2013. Proviso to section 129 (1) clarifies that this section is applicable to insurance, banking and companies engaged in generation of supply of electricity or class of companies who form financial statements according to the Act governing them. Therefore, regardless of the fact that the financial statements are prepared according to the law governing them, they will still be liable to pay MAT of their normal profits as per the law governing them is less than the MAT calculated. The HC in this case relied upon the Apex court’s judgement in Commissioner of Income Tax, Bangalore v. B.C. Shrinivasa Setty[viii], wherein it was held that a charging section and the computing provisions together constitute an integrated code and where computation provision cannot apply it would be evident that such a case was not intended to fall within the charging section.

In the case of Karnataka Small Scale Industries Development Corporation vs. CIT, the Hon’ble Apex Court held that regardless of the fact that income is computed on book profits or on normal provisions, business losses and unabsorbed depreciation can be set-off against the income computed as per the normal provisions and the balancing figure should be carried forward.

Conclusion

As a consequence, it can be said that MAT is a medium adopted by the authorities to reduce the dodging away of tax by companies despite making huge profits. These companies hide their illicit intentions, behind various relief provisions under Companies Act, 2013 and Income Tax Act, 1961, to escape their tax liability. This will ensure the payment of, as its name suggests, Minimum Alternate Tax by the companies. Further, the reason behind keeping certain transactions beyond the preview of MAT may either because tax is payable on them at specified rate lower than MAT rate making MAT applicable in every case or; the inclusion of such transaction will have a nullifying effect.

References

[i] Sub-section 7 to section 115JB of the Income Tax Act, 1961.

[ii] Explanation 4

[iii] Inserted as sub-section 5A to section 115JB by Finance Act, 2019. 

[iv] Sub-section 2A of section 115JAA of the Income Tax Act, 1961.

[v] Sub-section 3A of section 115JAA of the Income Tax Act, 1961.

[vi] Sub-section 4 of section 155JAA of the Income Tax Act, 1961.

[vii] Sub-section 5 of section 155JAA of the Income Tax Act, 1961.

[viii] Vol. 128 ITR 294.


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