In the realm of corporate taxation in India, Section 115JB of the Income Tax Act plays a pivotal role in ensuring that companies pay a minimum level of tax, regardless of the deductions and exemptions they may otherwise be entitled to. Commonly known as the Minimum Alternate Tax (MAT), this provision ensures that companies with substantial book profits contribute a minimum amount to the government.
What is Section 115JB?
Section 115JB introduces the concept of MAT, which applies when the tax payable by a company, as computed under normal provisions of the Income Tax Act, is less than a specified percentage of its “book profit.” In such cases, the book profit is deemed to be the total income of the company, and the tax payable is computed at the MAT rate.
From the assessment year commencing on April 1, 2020, the MAT rate has been reduced to 15%, down from the earlier rate of 18.5%. This change provides a more favorable tax environment for companies, while still maintaining a minimum tax contribution to the government.
Applicability of Section 115JB
Section 115JB applies to all companies, including foreign companies, unless specifically exempted by the provisions of the Income Tax Act. The main purpose of MAT is to prevent companies from using various deductions and exemptions to pay minimal or no taxes, despite earning significant profits.
The section is applicable when:
- The income tax payable on the total income as per the Income Tax Act is less than 15% of the company’s book profit.
- In such cases, the book profit is considered the total income of the company, and MAT is levied at the rate of 15%.
What is Book Profit Under Section 115JB?
The term “book profit” is central to understanding how MAT works. Book profit refers to the net profit as shown in the company’s statement of profit and loss, prepared in accordance with the provisions of the Companies Act, 2013. However, certain adjustments are made to this profit for the purposes of calculating MAT.
Key adjustments include:
- Additions: Income tax paid or payable, provisions made for unascertained liabilities, dividends paid or proposed, amounts set aside to reserves (except those under Section 33AC), deferred tax, and more.
- Reductions: Withdrawals from reserves created before April 1, 1997, income exempt under Section 10 (except Section 10(38)), unabsorbed depreciation, and loss brought forward in certain cases.
These adjustments ensure that the MAT is calculated on a fair representation of the company’s actual financial position.
Exemptions to MAT Under Section 115JB
While Section 115JB applies broadly, there are several important exemptions:
- Insurance and Banking Companies: Companies engaged in the life insurance business or banking sector are exempt from MAT. These businesses have their own regulatory frameworks for tax computation, which differ from standard companies. Notable rulings in this regard include Oriental Insurance Co. Ltd. vs. Deputy CIT (2018) and Royal Sundaram Alliance Insurance Co. Ltd. vs. CIT (2020).
- Foreign Companies: Foreign companies are also exempt under specific conditions:
- If they are residents of a country with which India has a tax treaty and they do not have a permanent establishment (PE) in India.
- If they earn income solely from businesses taxed at special rates, such as those under Sections 44B, 44BB, 44BBA, or 44BBB.
This exemption ensures that foreign companies, especially those operating under international tax treaties, are not unfairly burdened by MAT.
MAT for Companies Under Insolvency Proceedings
A significant amendment to Section 115JB offers relief to companies undergoing insolvency proceedings under the Insolvency and Bankruptcy Code (IBC), 2016. For such companies, the total loss, including unabsorbed depreciation, can be deducted from the book profit when computing MAT. This is crucial for companies in distress, as it prevents them from being further strained by high tax liabilities during the insolvency process.
This relief was introduced with effect from the assessment year 2018-19 and applies to companies that have initiated corporate insolvency resolution processes under Sections 7, 9, or 10 of the IBC. A corresponding press release from the Ministry of Finance in 2018 emphasized the government’s intent to reduce hardship for these companies.
Book Profit Adjustments for Companies Compliant with Ind AS
Companies that prepare their financial statements according to Indian Accounting Standards (Ind AS) must make additional adjustments to their book profits. These adjustments apply to items such as revaluation surplus on property, plant, and equipment (PPE), changes in fair value of investments, and re-measurements of defined benefit plans.
For instance:
- Revaluation gains: These are included in book profits when realized through sale or transfer of the underlying assets.
- Defined benefit plans: Gains and losses from re-measurement are included in book profits annually as they arise.
These adjustments ensure that MAT is calculated fairly for Ind AS-compliant companies and reflects their true financial position.
Key Case Laws on Section 115JB
Several judicial rulings have further clarified the application of Section 115JB. Some notable ones include:
- CIT vs. JSW Steel Ltd. (2020): This case dealt with the levy of interest under Sections 234B and 234C in MAT cases.
- CIT vs. Metal & Chromium Plater (P.) Ltd. (2019): This case confirmed that relief under Section 54EC is available when computing tax under MAT.
- Best Trading & Agencies Ltd. vs. DCIT (2020): The court ruled that the benefit of indexed cost of acquisition is available for computing capital gains under MAT.
FAQs
1. What is the MAT rate under Section 115JB?
The MAT rate under Section 115JB is 15%, applicable from the assessment year 2020-21 onwards.
2. Are foreign companies liable to pay MAT?
Foreign companies are exempt from MAT if they do not have a permanent establishment in India or if their income is taxed at special rates under specific sections such as 44B, 44BB, 44BBA, and 44BBB.
3. How is book profit calculated under Section 115JB?
Book profit is calculated by making specified adjustments to the net profit as shown in the company’s statement of profit and loss, prepared in accordance with the Companies Act, 2013.
4. Does MAT apply to companies under insolvency?
Yes, companies under insolvency proceedings can reduce total losses, including unabsorbed depreciation, from their book profit to compute MAT.
Conclusion
Section 115JB of the Income Tax Act is a critical tool in India’s tax framework, ensuring that all companies pay a minimum level of tax, even if they avail themselves of various exemptions and deductions. By imposing MAT, the government ensures that companies with significant book profits contribute to the exchequer, while offering certain exemptions and relief for companies in distress or those operating under specific sectors, such as insurance or banking.
Whether you are a domestic or foreign company, understanding how Section 115JB and MAT work is essential for ensuring compliance with India’s corporate tax laws. It’s advisable to consult a tax expert to ensure that all applicable adjustments, exemptions, and compliance requirements are met.
