Minimum Alternate Tax 115 JB

ofIncome Tax Act, 1961

CONCEPT

The concept of Minimum Alternate Tax (MAT) wasintroduced in the Direct Tax system to make sure that companies having large profits and declaring substantial dividends to shareholders but who werenot contributing to the Govt. by way of corporate tax, by taking advantage of the various incentives and exemptions provided in the Income-tax Act, paya fixed percentage of book profit as minimum alternate tax.

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.

The Finance Act, 2009 changes increased the MAT rate form 10% to 15%

which will result in higher cash outflow for Zero Tax companies. At a time,

when most industries are facing credit crunch, imposing higher tax, for which

credit may be available in future, seems to be out of sync with the finance

minister’s claim that this Budget is the first stimulus for the economy. Besides

the rate hike, the base for MAT has also been raised. Till now, any decline in

the value of assets could be netted off to arrive at the base for calculating

MAT. Not any more. Now, any diminution in the value of assets will have to

be added back to the book profit, which serves as the base.

NON APPLICABILITY

The provisions of MAT contained in section 115JB would not apply to the following incomes accruing or arising on or after 1st April 2005 :-

1. Income from any business carried on by an entrepreneur in a SEZ (10AA);

2. Income from the services rendered by an entrepreneur from a unit in a SEZ

(10AA);3. Income of a Developer from the development of a SEZ.

(80IAB)

RATE OF MAT

PROS N CONS OF MAT

The original idea behind MAT was to prevent people with very high incomes from using special tax benefits to pay little or no tax.

But for various reasons the MAT reaches more people each year, including some people who don't have very high income and some people who don't have lots of special tax benefits.

No credit of MAT paid under the new provision will be available.

RAHUL

METHOD OF COMPUTATION OF MAT

COMPANY

Compute P&L as per

Companies Act

Compute Book profit as per

115JB

Compute P&L as per Income tax

Act

COMPUTATION OF BOOK PROFIT

If 15% of Book Profit exceeds tax on total income then-Income = Book profitTax payable = 15% of Book profits

Surcharge 10% (Foreign company 2.5%) if Book profits exceeds 1 crore.

Educational cess 3% on aggregate of tax and surcharge.

Net profit as per profit& loss account XXX

ADD:• Income tax paid or payable -----• The amount of deferred tax and provision there of -----• Depreciation charged to P/L account -----• Proposed dividend or dividend paid -----• Amount carried to any reserve (Other than33AC) -----• Provision made for diminution in value of assets -----• The amount of any expenditure relatable to any income u/s 10(except 10(38)) or 11or 12. -----• Provision made for liabilities(Other than ascertained) -----• Provision made for losses of Subsidiary company -----

C/F ====

B/F XXX

LESS:• Amount withdrawn from any Reserve or provision -----• Depreciation as per P&L a/c Excluding

depreciation relatable to revaluation of assets. -----• Amounts withdrawn from revaluation reserves

and credited to p&l account, but it does notexceed the amount of depreciation -----

• The amount of loss B/F or unabsorbed -----Depreciation Whichever less, as per book of

accounts -----• The amount of deferred tax, if any such amount -----is

credited to the profit and loss accountBook profit XXX

Problem 1 :-

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 thecalculation of MAT tax liability under section

115JB forassessment year 2010-2011.

Particulars As per normal provisions IT

As per section 115JB

Total income or Book profit

Rs 100 Lakhs Rs 600 Lakhs

Tax liability 30% and 15%

Rs 30 Lakhs Rs 90 Lakhs

ADD. Surcharge 10% Rs 3 Lakhs Rs 9 Lakhs

Sub Total---- Rs 33 Lakhs Rs 99 Lakhs

ADD. Education cess & H. edu. Cess @ 3%

Rs 0.99 Lakhs Rs 2.97 Lakhs

Total Tax Rs 33.99 Lakhs Rs 101.97 Lakhs

Income Tax payable by Assessee

NA Rs 101.97 Lakhs

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 Fiveassessment year immediately succeeding the assessment year in which tax creditbecomes allowable under sub-section (1) of section 115JAA.

2. If MAT is paid u/s 115JB its credit can be carried forward and utilized Sevenassessment year immediately succeeding the assessment year in which tax creditbecomes allowable under sub-section (1A) of section 115JAA. (Inserted by FinanceAct,2006 ,w.e.f. 01-04-2007)

3. The credit allowed will not bear any interest.

A.Y. 1 2006-2007

2007-2008

2008-2009

2009-2010

2010-2011

2011-2012

Normal Tax liability

2 100 120 150 180 200 225

Tax liability U/S 115JB

3 300 90 110 200 150 175

Tax payable by the Assessee (higher of 2 and 3)

4 300 120 150 200 200 225

Additional Tax liability (4-2)

5 200 NIL NIL 20 NIL NIL

Credit U/S 115JAA utilised

6 ---- 30 40 --- 50 50

Credit available for carry forward

7 200 170 130 150 100 50

SAURAV

MAT UNDER DIRECT TAX CODE

The model adopted for MAT under existing law is based on book-profit. However, there is a marked shift in this respect as it is proposed to levy tax on the value of gross assets but in the revised draft it has stated that MAT will be based on Book Profit only . While this will certainly achieve the objective of charging tax from the companies making profit but not paying the tax at all and it will also penalize the companies which are sloth.

The DTC narrates the methodology to be followed for arriving at the value of GA as under:-

“Value of gross assets” will be A+ B+C-D-E

Where A = the value of the gross block of fixed assets of the company.

B = the value of the capital work in progress of the company.

C = the book value of all other assets of the company.

D = the accumulated depreciation on the value of the gross block of fixed assets.

E = the amount of debit balance of profit and loss account, if included in the amount ‘C’.

Limitation of MAT to be applied on basis of Gross Assets

Companies will have to pay tax even if they are loss making companies or operating in a cyclical downturn.

It will create industrial disparity as capital intensive industries viz Iron & Steel, Cement etc have to pay more than the labour intensive viz software industry. Thus it will reduce investments in Infrastructure .

In case of long gestation projects, this type of tax will further increase the cost of projects.

REVISED MAT

MAT to be calculated on book profits as compared to gross assets

The revised draft also does not allow for carry forward of MAT paid.

Mat should be lowered and should be in proportion of corporate tax rate.

DOES ADVANCE TAX APPLY TO MAT?

Yes. It is compulsory to pay advance tax in

the case of MAT as mentioned in CBDT Circular No.13/2001 dated 09/11/2001. Also Karnataka High Court in the case of Jindal Thermal Power has held that advance tax is payable under MAT. The companies liable to pay MAT are liable for the payment of advance tax and failing to do so will attract interest u/s 234B and 234C of the Act.

Presented By:-Abha MahtoRahul Kr. GuptaSaurav Dhingra