Assessment of Companies and MAT

The fundamental difference lies in their basis of calculation: normal tax liability is computed based on the company's taxable income as per the regular provisions of the Income Tax Act, after availing all eligible deductions, exemptions, and incentives. In contrast, Minimum Alternate Tax (MAT) liability is calculated on the company's 'book profit', which is the net profit as per its financial statements (prepared under Schedule III of the Companies Act, 2013), adjusted as per Section 115JB of the Income Tax Act.

Ultimately, a company is required to pay the higher of the two: its normal tax liability or its MAT liability. This ensures that even companies with significant book profits, but low taxable income due to various tax benefits, pay a minimum amount of tax. If the normal tax liability is lower than the MAT liability, the company pays MAT, and the excess tax paid (MAT over normal tax) becomes eligible for MAT credit under Section 115JAA.

DDT has been abolished for dividends declared, distributed, or paid on or after April 1, 2020. Currently, the classical system of taxation applies where the dividend is taxable in the hands of the shareholders at their applicable slab rates, and the company is required to deduct TDS under Section 194 at 10% (if dividend exceeds Rs. 5,000).

Minimum Alternate Tax (MAT) is a provision under Section 115JB of the Income Tax Act, 1961, designed to ensure that companies, which show substantial profits in their financial statements but pay little or no income tax due to various exemptions, deductions, and incentives, contribute a minimum amount of tax to the government. These are often referred to as "zero-tax companies". Under this section, if the income tax payable by a company on its total income, computed under the normal provisions of the Income Tax Act, is less than a prescribed percentage of its 'book profit', then the book profit is deemed to be the total income, and tax is levied at the MAT rate. As of Assessment Year 2020-21 (Financial Year 2019-20) and onwards, the MAT rate is 15% of the book profit, plus applicable surcharge and health & education cess. This provision applies to all companies, including foreign companies, subject to certain conditions.

Under Section 115JAA, the amount of MAT paid over and above the normal tax liability can be carried forward and set off in subsequent years up to a maximum of 15 assessment years immediately succeeding the assessment year in which such credit becomes allowable.

MAT credit arises when a company pays tax under the Minimum Alternate Tax (MAT) provisions (Section 115JB) because its tax liability computed under normal provisions is lower than the MAT liability. The excess tax paid over the normal tax liability is allowed as MAT credit. [2, 17]

Section 115JAA of the Income Tax Act, 1961, governs the provisions for MAT credit. [2, 17] The tax credit allowed is the difference between the MAT paid and the amount of tax payable on the total income computed under the other provisions of the Act. [2, 17]

Utilization of MAT Credit:
MAT credit can be utilized in subsequent assessment years when the tax payable under the normal provisions of the Act exceeds the MAT liability for that year. [15] The MAT credit can be set off against the normal tax liability to the extent of the difference between the normal tax liability and the MAT liability for that year. [15]

Carry Forward of MAT Credit:
MAT credit can be carried forward for a period of fifteen assessment years immediately succeeding the assessment year in which the credit becomes allowable. [15] If the MAT credit is not utilized within this period, it lapses. It is important to note that no interest is payable on the MAT credit. [2, 17]

When a company prepares its financial statements in accordance with Indian Accounting Standards (Ind AS), specific adjustments are required to be made to the net profit to arrive at 'Book Profit' for MAT purposes under Section 115JB. The Income Tax Act, 1961, provides specific explanations and rules for Ind AS compliant companies to reconcile their Ind AS-based profits with the book profit for MAT. [1, 31]

Key adjustments for Ind AS compliant companies include: [31]

• Items of Other Comprehensive Income (OCI): Certain items recognized in OCI, such as revaluation gains or losses on property, plant, and equipment (PPE) or financial instruments, are generally not considered for book profit in the year of recognition. They are typically considered for book profit in the year the related asset is disposed of, retired, or realized. [31]
• Fair Value Changes: Adjustments related to fair value changes, especially those that are not routed through the profit and loss statement but directly to OCI, need careful consideration. For instance, fair value changes in equity instruments designated at fair value through OCI are added or deducted to book profit only when disposed of. [31]
• Deferred Tax: The deferred tax expense or income arising from timing differences between accounting profit and taxable profit is a common adjustment. [31]
• Business Combinations and Amalgamations: Specific adjustments are prescribed for profits arising from business combinations or amalgamations, particularly concerning the treatment of goodwill or capital reserve. [1]

The objective of these adjustments is to neutralize the impact of certain accounting treatments under Ind AS that might distort the book profit for tax purposes, ensuring a level playing field and preventing tax avoidance. Companies must refer to the specific explanations and provisos under Section 115JB for Ind AS compliant entities and relevant ICAI Guidance Notes for detailed application. [32, 35]

MAT ensures that companies paying zero or low tax due to exemptions/deductions pay a minimum amount of tax. Under 115JB, if the normal tax liability of a company is less than 15% of its 'Book Profit', the Book Profit is deemed to be the total income, and tax is payable at 15% (plus surcharge and cess). MAT credit can be carried forward for 15 assessment years.

A company is required to pay the higher of the tax computed under the normal provisions of the Income Tax Act, 1961, or the Minimum Alternate Tax (MAT) liability. This is often referred to as the 'higher of the two' rule. [8]

The underlying rationale for this provision, primarily governed by Section 115JB, is to ensure that all companies, especially those that are profitable, contribute a minimum amount of tax to the government exchequer. [8] Many companies, despite showing significant accounting profits in their financial statements, could historically reduce their taxable income to a very low or even zero level by availing various deductions, exemptions, and incentives provided under the Income Tax Act. These were often termed 'zero-tax companies'. [8]

To counter this, MAT was introduced to bring such companies into the tax net. By mandating payment of the higher of the normal tax or MAT (calculated on 'Book Profit'), the government ensures a minimum tax collection from profitable entities, promoting equity and preventing tax avoidance. [8]

For MAT purposes, 'Book Profit' is the net profit as shown in the company's profit and loss account, prepared in accordance with Schedule III to the Companies Act, 2013. This net profit is then adjusted by certain additions and deductions specified in Explanation 1 to Section 115JB. Key adjustments include adding back amounts debited to the profit and loss account for income tax, amounts transferred to reserves, provisions for unascertained liabilities, and certain exempt incomes. Conversely, amounts like the loss brought forward or unabsorbed depreciation (whichever is less as per books of account) are deducted.

For Ind AS compliant companies, specific amendments were introduced to Section 115JB (sub-sections 2A, 2B, and 2C) to address the impact of Ind AS adoption on book profit calculation. Adjustments arising from the first-time adoption of Ind AS, particularly those affecting retained earnings or 'Other Comprehensive Income' (OCI) items, are included in book profits over a period of five years. Items in OCI that will not be reclassified to profit or loss are adjusted to book profit at the time of their realization or disposal.

Yes, companies operating as units in an International Financial Services Centre (IFSC) in India enjoy special provisions regarding Minimum Alternate Tax (MAT). Under Section 115JB(7) of the Income Tax Act, 1961, if an IFSC unit derives its income solely in convertible foreign exchange, the MAT rate applicable is a concessional 9% (plus applicable surcharge and cess), instead of the standard 15%. This reduced rate is a significant incentive for businesses to establish operations in IFSC, such as GIFT City.

In addition to the reduced MAT rate, IFSC units are also eligible for a 100% tax exemption on income from approved activities for 10 consecutive years out of 15 years, under Section 80LA of the Income Tax Act. These benefits cover various financial services like banking, fund management, insurance, and capital market services, provided the income is in convertible foreign exchange. Companies opting for special rate taxation under Section 115BAA and 115BAB are exempt from MAT entirely.

Section 115BAA allows domestic companies an option to pay income tax at a concessional rate of 22% (effective rate 25.168% inclusive of 10% surcharge and 4% cess) subject to the condition that they do not claim specified deductions/exemptions (e.g., SEZ holidays, additional depreciation, Chapter VI-A deductions other than 80JJAA). Companies opting for this are exempt from MAT.

MAT is levied under Section 115JB to ensure that zero-tax companies paying dividends but showing nil or negligible taxable income due to various exemptions/deductions still pay a minimum amount of tax. MAT is calculated at 15% (plus surcharge and cess) on the 'book profit' of the company.

Minimum Alternate Tax (MAT) is applicable to a company in India if the income tax payable on its total income, computed under the normal provisions of the Income Tax Act, 1961, is less than a prescribed percentage of its 'Book Profit'. The primary objective of MAT is to ensure that companies showing substantial profits in their financial statements do not pay negligible or zero tax due to various exemptions, deductions, and incentives available under the income tax law. [8]

For MAT purposes, 'Book Profit' is computed based on the net profit as shown in the company's Statement of Profit and Loss, prepared in accordance with Schedule III to the Companies Act, 2013. [1, 8] This net profit is then adjusted by certain additions and deductions specified in Explanation 1 to Section 115JB. [1, 8]

Key additions to the net profit, if debited to the profit and loss account, include: [1, 8]

• Income tax paid or payable and the provision therefor.
• Amounts carried to any reserves, other than revaluation reserve.
• Provision for unascertained liabilities.
• Provision for losses of subsidiary companies.
• Dividends paid or proposed.
• Expenditure related to income exempt under Section 10 (other than Section 10(38) or 10(34)).
• Depreciation, including the depreciation on revaluation of assets (except for certain cases).

Key deductions from the net profit, if credited to the profit and loss account, include: [1, 8]

• The amount withdrawn from any reserve or provision, if credited to the profit and loss account.
• Income exempt under Section 10 (other than Section 10(38) or 10(34)).
• Amount of brought forward loss or unabsorbed depreciation, whichever is less as per books of account. [1, 4]

MAT Credit, governed by Section 115JAA of the Income Tax Act, 1961, is a mechanism to provide relief to companies that pay tax under MAT. When a company's tax liability as per MAT (under Section 115JB) is higher than its tax liability computed under the normal provisions of the Act, the excess tax paid is allowed as MAT credit.

Calculation: The MAT credit available is the difference between the tax paid under Section 115JB and the amount of tax payable by the company on its total income under the normal provisions of the Act.

Utilization: This credit can be utilized in subsequent assessment years when the tax payable under the normal provisions of the Act exceeds the MAT liability for that year. The set-off is allowed to the extent of the difference between the normal tax liability and the MAT liability for that subsequent year. No interest is paid on the MAT credit.

Carry Forward: The MAT credit can be carried forward for set-off for fifteen assessment years immediately succeeding the assessment year in which the credit becomes allowable. However, it cannot be carried forward beyond this period. For assessment years up to 2017-18, the carry-forward period was ten years.

For companies liable to pay Minimum Alternate Tax (MAT) under Section 115JB of the Income Tax Act, 1961, it is mandatory to obtain and furnish a report in Form 29B. [3, 12, 16] This form serves as a certification that the 'Book Profit' has been computed in accordance with the provisions of Section 115JB. [3, 13]

Role of a Chartered Accountant:
Form 29B must be certified by a Chartered Accountant (CA). [3, 10, 16] The CA is responsible for examining the company's books of account and ensuring that the computation of book profit and MAT liability adheres to the requirements of Section 115JB. [10, 16] This certification is crucial for transparency and compliance. [3]

Filing Requirements:

• Form 29B needs to be filed electronically. [10]
• It must be obtained and submitted one month before the due date for filing the income tax return (ITR) under Section 139(1), or along with the return of income furnished in response to a notice under Section 142(1)(i). [10, 12]
• Once the CA uploads the form, the assessee (company) is required to accept and e-verify it on the Income Tax e-filing portal for successful submission. [12]

Filing Form 29B correctly and on time is essential for companies to remain compliant and avoid penalties. [3]