Minimum Alternate Tax u/s 115JB Income Tax Act India

When the Company needs to pay the Minimum Alternate Tax? If the income-tax payable by a Company, on the total income as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 2011, is less than 18.5% of its book profit,

such book profit shall be deemed to be the total income of the Company, and the tax payable by the Company on such total income shall be the amount of income-tax at the rate of 18.5% of the book profit.

Example AB Pvt Ltd has a tax liability on it's normal taxable income of Rs.3 lakhs. AB Pvt Ltd., has book profit of Rs.20 Lakhs as computed under section 115JB. Therefore as per section 115JB, tax on the book profit would be Rs.3.70 Lakhs. Hence, AB Pvt Ltd., has to pay tax MAT (i.e., Rs.3.70 Lakhs), since the normal tax liability (Rs.3.00 Lakhs) is less than 18.5% of the Book Profit. In Summary Tax payable by a Company is Higher of the following:

Tax payable at the normal rates prescribed by the Finance Act, or Minimum Alternate Tax @ 18.5% of the Book Profit of the Company computed in accordance with Section 115JB.

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Book Profit
Preparing The Annual Accounts Every assessee, being a company, shall, for the purposes of this section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI of the Companies Act, 1956. While preparing the annual accounts including profit and loss account, 1. the accounting policies,

2. the accounting standards adopted for preparing such accounts including profit and loss account, 3. the method and rates adopted for calculating the depreciation, shall be the same as have been adopted for the purpose of preparing such accounts and laid before the company at its annual general meeting in accordance with the provisions of section 210 of the Companies Act, 1956. Calculating Book Profit For the purposes of this section, book profit means the net profit as shown in the profit and loss account for the relevant previous year, as Increased by the following amounts debited to Profit and Loss Account 1. Income-tax paid or payable, and the provision thereof, including i. any tax on distributed profits under section 115-O or on distributed income under section 115R, ii. any interest charged under this Act, iii. surcharge, if any, as levied by the Central Acts from time to time, iv. Education Cess on income-tax, if any, as levied by the Central Acts from time to time; and v. Secondary and Higher Education Cess on income-tax, if any, as levied by the Central Acts from time to time. 2. Transfer to Reserves (Other than Section 33AC w.e.f. AY 2003-2004) 3. Amount set aside to meet unascertained liabilities, 4. Provision for losses of Subsidiaries, 5. Dividends Proposed or Paid, 6. Expenditure relatable to Income (eligible for deduction from Book Profit) exempt under section 10 or 11 or 12, 7. Amount of depreciation, including amount of depreciation on Revalued amount of Fixed Asset, 8. Amount of deferred tax and the provision thereof, 9. Amount or amounts set aside as provision for diminution in the value of any asset. Top Amounts to be Reduced Such Net Profit, as increased, shall be reduced by the following amounts: Only, if credited to the Profit and Loss Account: 1. Amount withdrawn from Reserves or Provisions from those created before 01.04.1997 without debiting Profit and Loss Account, 2. Amount withdrawn from reserves created on or after 01.04.1997 if such amount was allowed to be charged to Net Profit for the purpose of Section 115JB or Section 115JA,

3. Income exempt under section 10 [other than 10(38), 10(23G)] or 11 or 12, 4. Amount of Deferred Tax 5. Amount withdrawn from Revaluation Reserve to the extent it does not exceed the depreciation on revalued amount of Fixed Asset charged to Profit and Loss Account Others: 6. Amount of depreciation, excluding amount of depreciation on Revalued amount of Fixed

Asset, 7. Lower of the following: i. Brought Forward Loss (as per Books) Loss does not include Depreciation, ii. Unabsorbed Depreciation (as per Books), 8. Profits eligible for deduction under section 80HHC or 80HHE or 80HHF, upto Assessment Year 2005-06 9. Amount of Profits of Sick Industrial Company, during the period of sickness. Top

Other Aspects
The aforesaid computation of Book Profit and Minimum Alternate Tax shall not affect the determination of the amounts in relation to the relevant previous year to be carried forward to the subsequent year(s) under the provisions of section 32(2) or of section 32A(3) or section 72(1)(ii) or section 73 or section 74 or of section 74A(3). Top

Form 29B Report

Every company to which this section applies, shall furnish a report in the prescribed form 29B from an accountant as defined in the Explanation below section 288(2), certifying that the book profit has been computed in accordance with the provisions of this section. Top

Companies in SEZ
The provisions of this section shall not apply to the income accrued or arising from 01-April2005 to 31-March-2012, from any business carried on, or services rendered, by an entrepreneur or a Developer, in a Unit or Special Economic Zone, as the case may be.

Understanding intricacies of Minimum Alternate Tax

By CA Sachin Jain NORMALLY, a company is liable to pay tax on the income computed in accordance with the provisions of the income tax Act, but the profit and loss account of the company is prepared as per provisions of the Companies Act. There were large number of companies who had book profits as per their profit and loss account but were not paying any tax because income computed as per provisions of the income tax act was either nil or negative or insignificant. In such case, although the companies were showing book profits and declaring dividends to the shareholders, they were not paying any income tax. These companies are popularly known as Zero Tax companies. In order to bring such companies under the income tax act net, section 115JA was introduced w.e.f assessment year 1997-98. According to this section, if the taxable income of a company computed under this Act, in respect of previous year 1996-97 and onwards is less than 30 % of its book profits, the total income of such company is chargeable to tax for the relevant previous year shall be deemed to an amount equal to 30 % of such book profits. The Finance Act, 2000, inserted section 115JB of the Income-tax Act, 1961, with effect from 1-4-2001, i.e., from the assessment year 2001-02 providing for levy of Minimum Alternate Tax on companies. Section 115JB conceptually differs from erstwhile section 115JA, which provided for MAT on companies, so far as it does not deem any part or the whole of book profit as total income. However, the new provision of section 115JB provides that if tax payable on total income is less than 7.5% of book profit, the tax payable under this provision shall be 7.5% of book profit. Computation of Book Profit :Book profit means the net profit as shown in the profit and loss account for the relevant previous year as increased by 1. the amount of income-tax paid or payable, 2. the amounts carried to any reserves, [other than a reserve specified under section 33AC;] or 3. the amount set aside to provisions made for meeting liabilities, other than ascertained liabilities; or 4. the amount by way of provision for losses of subsidiary companies; or 5. the amount of dividends paid or proposed ; or 6. the amount of expenditure relatable to any income to which section 10,other than secton 10(23G) or section 10A or section 10B or secton 11 or section 12 apply ; or 7. the amount of depreciation, (Inserted by Finance Act,2006 ,w.e.f. 01-04-2007) [ if any amount referred to in clauses ( 1 ) to ( 7 ) is debited to the profit and loss account, and as reduced by ] the amount withdrawn from any reserve or provision

 the amount of income to which any of the provisions of section 10, other than secton 10(23G) or section 10A or section 10B or secton 11 or section 12 apply, if any such amount is credited to the profit and loss account; or the amount of depreciation debited to the profit and loss account (excluding the depreciation on account of revaluation of assets) (Inserted by Finance Act,2006 ,w.e.f. 0104-2007) ; or the amount withdrawn from revaluation reserve and credited to the profit and loss account, to the extent it does not exceed the amount of depreciation on account of revaluation of assets referred to in clause ( iia ) ( Inserted by Finance Act,2006 ,w.e.f. 0104-2007 ) ; or the amount of loss brought forward or unabsorbed depreciation, whichever is less as per books of account. Explanation .For the purposes of this clause, ( a ) the loss shall not include depreciation; ( b ) the provisions of this clause shall not apply if the amount of loss brought forward or unabsorbed depreciation is nil; or] the amount of profits eligible for deduction under Section 80HHC, 8OHHE, 80HHF 7. the amount of profits of sick industrial company MAT Rate :S.No. Section Assessment Year % Rate of MAT

115JA 1997-98 to 2000-2001

30 % of Book Profit

115JB 2001-2002 to 2006-2007

7.5 % of Book Profit

115JB 2007-2008 and 2008-2009 10% of the book profit.

Procedure for Computation of MAT u/s 115JB :The provisions of section 115JB provide for working out the income-tax payable as MAT on a deeming basis. The MAT tax liability under section 115JB can be worked out by undergoing the following steps:1. Compute the total income of the company (ignoring the provisions of u/s115JB). 2. Compute the income-tax payable on total income is worked out under (i) above. 3. Work out the Book Profit under the provisions of section 115JB.

4. Calculate 10 per cent of book profit (as per provisions of section 115JB). 5. MAT tax liability as worked out under (iv) above would be the tax payable if it is more than the amount of tax worked out (ii) above. A numerical illustration:ABC Ltd. had its computed total income at Rs.100 lakhs and its book profit as computed under section 115JB is Rs.600 lakhs. In such an event, the following would be the calculation of MAT tax liability under section 115JB for assessment year 2007-2008 as discussed above : i) Total Income 33.66% of total income being tax payable ii) (30%+10% surcharge+2% E.Cess) iii) Book Profit 11.22% of the Book Profit iv) (10% + 10% surcharge + 2% E.Cess) v) Income tax payable under MAT (since higher than tax on total income at (ii) above) = Rs.100 lakhs = Rs.33.66 lakhs = Rs.600 lakhs = Rs.67.32 lakhs = Rs.67.32 lakhs

Hence, the tax payable by ABC Ltd. for assessment year 2007-08 would be Rs.67.32 lakhs since the tax payable on book profit under section 115JB is higher than the tax payable on computed Total Income MAT Credit :As per section 115JAA, MAT credit can be carried forward for set-off against regular tax payable during the subsequent years subject to certain conditions, as under:-

1. If MAT is paid u/s 115JA its credit can be carried forward and utilized Five
assessment year immediately succeeding the assessment year in which tax credit becomes allowable under sub-section (1) of section 115JAA.

1. If MAT is paid u/s 115JB its credit can be carried forward and utilized Seven
assessment year immediately succeeding the assessment year in which tax credit becomes allowable under sub-section (1A) of section 115JAA. (Inserted by Finance Act,2006 ,w.e.f. 01-04-2007) 1. The credit allowed will not bear any interest. A numerical illustration:A.Y. Normal Tax Tax Additional Credit Credit

tax liability payable tax liability u/s. by the liability 115JB assessee [Higher (4) - (2) of (2) and (3)] (1) (2) (3) 300 90 110 200 150 175 (4) 300 120 150 200 200 225 (5) 200 NIL NIL 20 NIL NIL

u/s. available 115JAA for carry utilised forward

(6) 30 # 40 50 50

(7) 200 170 130 150 100 50*

2006- 100 07 2007- 120 08 2008- 150 09 2009- 180 10 2010- 200 11 2011- 225 12

# Even though credit of 200 is available, only 30 can be utilised so that the tax payable by the assessee does not go below the amount computed u/s. 115JB. * out of the credit of 50, 30 is belonging to A.Y. 2006-07 and 20 belongs to A.Y. 2009-10. In view of provisions of sub-section (3) of section 115JAA the credit of 30 will not be allowable after A.Y. 2011-12 and would accordingly lapse. However, credit of 20 pertaining to A.Y. 2009-10 would be allowed to be carried forward till A.Y. 2014-15. Special Provision for Certain Companies :Special provisions were set in the statute to provide complete tax holiday for newly established undertakings in FTZ, EHTP, STP (Section 10A) and for newly established 100% export-oriented undertakings (Section 10B). This complete tax holiday is available for first 10 assessment years. Units covered under Section 10A and Section 10 B were immune from the levy of MAT. Also income accrued or arising after 31st March 2005 from any business / services set up in SEZ was exempted from levy of MAT. Proposal in Budget 2007-2008 :The extension of the minimum alternate tax (MAT) regime to income streams, which in the normal course are exempt, appears to be a continuing trend. This year the budget has proposed to extend the MAT provisions to companies engaged in inter alia the IT and BPO sectors that are availing tax deduction under section 10A and 10B of the Income-Tax Act, 1961 (Act). The Budget also does not extend the sunset clause under section 10B of the Income-Tax Act, which allows EOUs to avail 100% tax exemption on export earnings after March 31,

2009. The commerce ministry has been lobbying to exempt EOUs from income-tax for another ten years after March 2009. The tax paid under MAT can be carried forward as a credit and offset against the normal corporate tax liability for a period of seven financial years. In light of the sunset provision contained in section 10A of the Act, which prescribes a date of March 31, 2009, on which the tax holiday scheme expires, the introduction of MAT for the IT and BPO sector is likely to represent at most a cash flow issue. The MAT impact may also be neutralised on account of foreign tax credits that are offset against MAT payable.

Payment of Advance tax :All companies are liable for payment of advance tax having regard to the provisions contained in new section 115JB. Consequently, the provisions of sections 234B and 234C for interest on defaults in payment of advance tax and deferment of advance tax would also be applicable where facts of the case warrant

Procedure for Income Tax Return :Every company to which this section applies, shall furnish a report in the prescribed form (Form 29B) from an accountant as defined in the Explanation below sub-section (2) of Section 288, certifying that the book profit has been computed in accordance with the provisions of this section along with the return of income filed under sub-section (1) of Section 139 or along with the return of income furnished in response to a notice under clause ( i ) of sub-section (1) of section 142. (The views expressed are personal of the author, working with a corporate)