Understanding Minimum Alternative Tax (MAT) Under Section 115JB: A Comprehensive Guide

Understanding Minimum Alternative Tax (Section 115JB)

Minimum Alternative Tax (MAT) is designed to address the issue of “zero tax companies,” which, despite reporting significant book profits and distributing substantial dividends, evade tax obligations thanks to various incentives under the Income-tax Law.

Originally introduced in the Finance Act of 1987, MAT was briefly withdrawn by the Finance Act of 1990. However, it was reinstated in the Finance Act of 1996.

MAT Rates

• The standard MAT rate is 15% plus applicable surcharge and cess.
• For companies categorized as units of an International Financial Services Centre, the MAT rate is reduced to 9% plus applicable surcharge and cess, provided they derive income solely in convertible foreign exchange.

Tax Liability Calculation

A company’s tax liability is determined by the higher of two calculations:

1. Normal Tax Liability: This is calculated based on the company’s taxable income by applying the relevant tax rate.

2. MAT Liability: This is computed at 15% plus applicable surcharge and cess on the book profit, as outlined in later sections.

Example Calculation

Consider ABT Ltd, which reports:

• Book Profit: ₹100,000
• Taxable Profit (as per the Income Tax Act): ₹30,000

Tax Calculation:

• MAT (15% of Book Profit): ₹100,000 x 15% = ₹15,000
• Normal Tax (30% of Taxable Profit): ₹30,000 x 30% = ₹9,000

In this scenario, the tax liability will be ₹15,000, as it is higher than the normal tax.

Applicability of MAT

Certain entities are exempt from MAT provisions:

• Domestic companies that choose the tax regimes under Section 115BAA or Section 115BAB:
  • Section 115BAA: Domestic companies can opt for a tax rate of 22%, plus a 10% surcharge and 4% cess.
  • Section 115BAB: Companies under this section must pay a tax rate of 22% on income unrelated to manufacturing or production, with no deductions allowed on such income.
• Income derived from life insurance business as specified in Section 115B.
• Shipping companies whose income is subject to tonnage taxation.

MAT Credit

MAT Credit can be carried forward for up to 15 years and will lapse after this period.

Example of MAT Credit

For the financial year 20-21, if ABT Ltd's tax liability according to normal provisions is ₹10 lakh, while the MAT liability is ₹11 lakh, the company is obligated to pay MAT. Consequently, ABT Ltd can claim MAT credit of ₹1 lakh, to be adjusted against normal tax liabilities in future financial years when applicable.

Chartered Accountant Report Requirement

Companies subject to Section 115JB must obtain a report from a Chartered Accountant in Form No. 29B. This report certifies that the computation of the book profit aligns with Section 115JB provisions. It must be acquired by the specified date referenced in Section 44AB, and the report should be filed electronically.

Conclusion

Understanding the provisions and implications of Minimum Alternative Tax is crucial for companies to ensure compliance and optimize their tax liabilities. Proper documentation and calculations are essential for leveraging MAT benefits, including MAT credit.