In this blog post, Meghana Dhandhania, a fourth-year law student at Pravin Gandhi College, Mumbai and a Diploma in Entrepreneurship Administration and Business Laws by NUJS, discusses how a Minimum Alternate Tax or MAT is applicable to a multi-national company.

The Minimum Alternate Tax (MAT) was introduced in Indian tax law in 1987, well before India’s 1991 economic reforms and the beginning of foreign portfolio investment in its capital markets in 1993.  Prior to 1987, the scenario was that at times it happened that a taxpayer, being a company, generated income during the year, but by taking the advantage of various provisions of Income-tax Law (like exemptions, deductions, depreciation, etc.), it reduced its tax liability or did not pay any tax at all.

The objective of introduction of MAT by the Lawmakers was that there were many companies which were disclosing massive profit in the accounts as laid in the Annual General Meeting (AGM) before the shareholder’s but at the same time these companies were also showing nil profits or profits that were a little above nil for the income tax purpose. Variance between profits as per the Companies Act and as per the Income Tax Act was due to many dissimilar allowance or disallowance in both the Acts e.g. difference in method and rate of depreciation provided in both Acts. To put an end to the trend of increase in the number of “zero tax companies”, MAT was introduced by the Finance Act, 1987 according to which corporate entity has to pay minimum tax with effect from the assessment year 1988-89.

Later on, MAT was withdrawn by the Finance Act, 1990 and then reintroduced by Finance (No. 2) Act, 1996, w.e.f. 1-4-1999. Since the introduction of MAT, several changes have been introduced in the provisions of MAT and today it is levied on companies as per the provisions of section 115JB of Income Tax Act, 1961.

ANALYSIS OF PROVISION OF SECTION 115JB:

As per Section 115JB of Income Tax, 1961(hereafter referred to as the “Act”), if the income tax payable by a company on its total income as computed under the Act in respect of any previous year relevant to the Assessment year commencing on or after 1st April 2012 is less than 18.5% of such book profit then the tax payable for the relevant previous year shall be deemed to be 18.5% of such book profit. Surcharge and cess shall be levied separately on such amount. Book Profit is defined in the explanation 1 to section 115JB as book profit means the net profit as shown in the profit & loss account for the relevant previous year and as increased and decreased by some prescribed items. In simple words to compute book profit, we have to take profit & loss account and make some prescribed additions and deletions to it.

In the simple words, every company has to compute its income tax liability as per two sets of provisions. The set of provisions which results in higher income tax liability become the income tax payable.

Following are the two set of provisions:

1). Income tax computed as per normal provisions of income tax act.

2). Income tax computed as per provision of section 115JB of income tax act.

We can understand the concept of MAT with the help of an illustration. Suppose, the taxable income of company XYZ Pvt. Ltd. computed as per the provisions of Income-tax Act is Rs. 30,00,000. Book profit of the company computed as per the provisions of section 115JB is Rs. 20,00,000. What will be the tax liability of XYZ Pvt. Ltd. (ignore cess and surcharge)?

The tax liability of a company will be higher of

(i) Normal tax liability, or

(ii) MAT.

Normal tax rate applicable to an Indian company is 30% (plus cess and surcharge as applicable). Tax @ 30% on Rs. 30,00,000 will amount to Rs. 9,00,000 (plus cess). Book profit of the company is Rs.20, 00,000. MAT liability (excluding cess and surcharge) @ 18.50% on Rs.20, 00,000 will come to Rs. 3,70,000. Thus, the tax liability of XYZ Pvt. Ltd. company will be Rs. 9,00,000 (plus cess as applicable), being higher than the MAT liability.

As per Section 115JB(2) of the Act, a company will prepare its profit and loss account for the relevant previous year in accordance with the provisions of Part II of Schedule VI of the Companies Act, 1956. However, while preparing the annual accounts including profit and loss account:

(a) The accounting policies;

(b) The accounting standards followed for preparing such accounts including profit and loss accounts;

(c) The methods and rates adopted for calculating the depreciation,

shall be the same as have been adopted for the purpose of preparing such accounts including profit and loss account and laid before the company at its annual general meeting in accordance with the provisions of Section 210 of the Companies Act, 1956. However, where the company has adopted or adopts the financial year different from previous year, (a), (b) and (c) aforesaid shall correspond to the accounting policies, accounting standards and the method and rates for calculating the depreciation which have been adopted for preparing such accounts including profit and loss account for such financial year or part of such financial year falling within the relevant previous year.

The spirit behind levy of MAT is that every person participating in the economy must contribute to the exchequer. MAT is aimed at recouping a part of the loss in revenue collection on account of exemptions, deductions and other tax incentives in the corporate sector. MAT was introduced to address inequity in taxation of corporate taxpayers and to promote inter-se equity among them. Accordingly, Finance Bill 2016 proposes to amend the law with retrospective effect from 1.4.2001.

MAT CREDIT

A new tax credit scheme is introduced by which minimum alternate tax paid can be carried forward for set-off against regular tax payable. Any company that pays minimum alternate tax under the MAT clause instead of a regular tax, then if the tax paid is more than that accrued, the excess amount is credited back as tax credit to the company. Thus, MAT credit can be understood as the difference between the tax calculated under the general provisions of the Income Tax Act and that calculated under the MAT provisions of the Act. Such excess of tax credit is allowed to be carried forward and set off in the financial year in which the company is liable to pay tax under the general provisions of the Income Tax Act. This MAT credit can be carried forward and set-off for 10 consecutive assessment years succeeding the year in which the tax credit first accrued.

APPLICABILITY AND NON-APPLICABILITY OF SECTION 115JB

The provisions of MAT are applicable to every company whether public or private and whether Indian or foreign. Section 115 JB of the Act does not make a distinction between the Indian company and a foreign company. The definition of a company in Section 2(17) of the Act means an Indian company or any company incorporated by or under the laws of a country outside India. But, according to the recent amendments to the Act, the provisions of Section 115 JB shall not be applicable to certain foreign companies. The reason for the amendment is explained as follows in the Memorandum explaining provisions of the Finance Bill, 2016:

“Under the existing provisions contained in sub-section (1) of Section 115JB in case of a company, if the tax payable on the total income as computed under the Income-tax Act, is less than eighteen and one-half percent of its book profit, such book profits shall be deemed to be the total income of the assessee and the tax payable by the assessee for the relevant previous year shall be eighteen and one-half percent of its book profit. Issues were raised regarding the applicability of this provision to foreign institutional investors (FII’s) who do not have a permanent establishment (PE) in India. Vide Finance Act, 2016 provision of Section 115 JB were amended to provide that in case of a foreign company any income chargeable at a rate lower than the rate specified in Section 115 JB shall be reduced from the book profits and the corresponding expenditure will be added back.”

However, since this amendment was prospective w.e.f. The assessment year 2016-17 the issue for assessment year prior to 2016-17 remained to be addressed.

A committee on direct tax matters headed by Justice A.P. Shah, setup by the government to look into the matter, recommended for an amendment of Section 115 JB to clarify the applicability of minimum alternate tax (MAT) provisions to foreign institutional investors/ foreign portfolio investors (FII’s/FPI’s) in the view of the fact that FII’s and FII’s normally do not have a place of business in India.

In view of the recommendations of the committee and with a view to provide certainty in taxation of foreign companies it is proposed to amend the Income Tax Act so as to provide that with effect from 1-04-2001, the provisions of Section 115 JB shall not be applicable to a foreign company if –

1. Such foreign company may be a resident of a country with which India has Double Taxation Avoidance Agreement (DTAA) or an agreement under Section 90A of the Act and such foreign company does not have a Permanent Establishment (PE) in India.
2. Such foreign company, where India does not have a DTAA, and such foreign company are not required to seek registration under the applicable provisions in India.

Explanation 4, as inserted, with effect from the assessment year 2001-02 provided for the removal of doubts and, accordingly, it is by way of a clarification. Thus in the case of a foreign company, to illustrate, not having a permanent establishment or not required to seek registration (as stated above), the matter is put beyond doubt to end the litigation, by way of a clarification. In other words, Explanation 4, as such, lays down that only in the situations clarified, the provisions would not be applicable.

The question relating to minimum alternate tax came up before the Supreme Court in the case of Castleton Investment Ltd. Vs. Director of Income Tax(International taxation) [MANU/SC/1354/2015]. The basic issue before the Hon’ble Supreme Court which was raised pertained to the applicability of Section 115JB of the Income Tax Act, 1961 in respect of a foreign company which does not have any Permanent Establishment (PE) in India. The court, in this case, decided that Section 115JB shall not be applicable to a foreign company if  the foreign company is a resident of a country having Double Taxation Avoidance Agreement with India and such foreign company does not have a Permanent Establishment within the definition of the term in the relevant Double Taxation Avoidance Agreement, or the foreign company is a resident of a country which does not have a Double Taxation Avoidance Agreement with India and such foreign company is not required to seek registration under Section 592 of the Companies Act 1956 or Section 380 of the Companies Act, 2013.

The amendment to Section 115JB of the Act can be hoped to attract more foreign investment with India paving its way to success in the international market and for being a progressive and safe country for investing with revised FDI norms.