Minimum Alternate Tax-Under Section 115JB
Minimum Alternate Tax as per Section 115JB of Income Tax Act – As the name itself suggests that if for a company in the previous year the tax payable to the Government falls below a certain limit, the company needs to pay tax on the basis of Minimum Alternate basis i.e tax payable on book profits to be calculated in different ways.
Now let’s see what the Income Tax Act has said about Minimum Alternate Tax under section 115JB.
As per section 115JB of the Income Tax Act, if for any previous year for a company the tax payable on the total income as calculated on the basis of the Income Tax Act, falls below 18.5% of its book profits, such book profits shall be deemed to be the total income of that company and Minimum Alternate Tax has to be paid @18.5% of such book profits.
Further, the profit & loss account must be prepared in accordance with the provisions parts II & III of the Schedule VI of the Companies Act.
Therefore, this section 115JB says that the company assesses are to pay taxes @18.5% on their book profits if the tax payable on the basis of total income as calculated as per income tax act is less than 18.5% of the book profits. Thus, the tax has to be paid higher of the following two:
- Tax payable on the basis of total income as coming from the Profit & Loss Account and
- Tax @18.5% on the book profits.
Minimum Alternate Tax or MAT does not mean that all the companies are not paying taxes. This provision is meant for inclusions of more and more companies under the tax net so that Government revenue in the form of direct tax collection gets increased.
There are plenty of previous instances where big companies earning huge profits, did not pay adequate taxes on income due to claiming more and more deductions on book profits and also paying dividends. This has led to lower net income and lower revenue for the Government.
⇒Calculation of book profit for MAT
While calculating book profits under section 115JB of Income Tax Act for obtaining Minimum Alternative Tax the net profits as derived from the P&L account are to be adjusted for the following incidents:-
The following amounts are to be added back to Net Profits if these were debited to the P&L account in the previous year:
- Income Tax paid or payable if any and provisions made, therefore;
- The amount of reserve transferred by whatever name it is called;
- Provisions made for loss of subsidiary companies if any;
- Provisions made for meeting contingent liabilities;
- Dividend paid or proposed;
- Depreciation calculated as per the provisions of the companies act including the depreciation for revaluation of assets;
- Provision for Deferred Tax or the amount of deferred tax;
- Amount of expenditure incurred in relation to exempt income u/s 10,11 & 12 like Long Term Capital Gain Tax is to be considered for MAT.
The following amounts are to be deducted from Net Profits if these were credited to the P&L account in the previous year:
- Amount of reserve withdrawn;
- Exempt income u/s 10,11 & 12;
- If an amount is withdrawn from Revaluation Reserve and credited to the P&L account;
- Any amount if any is withdrawn from revaluation reserve and credited to P&L account;
- Amount of deferred tax if any are credited to the P&L account;
- Amount of loss brought forwarded and unabsorbed depreciation if any;
⇒How to calculate Minimum Alternate Tax under section 115JB of Income Tax Act?
If it is seen that taxes paid by a company assessee in a previous year on the basis of the net income or net profits as derived from the P&L account is not adequate, the net profits would have to be adjusted (addition to & deduction from net profits) with the above mentioned allowable and disallowable items to arrive at Book Profits for calculation of Minimum Alternate Tax.
Now, let’s take an example for easy understanding.
Example: A company XYZ has a net income as per the provisions of Income Tax Act of ₹50 Lakh and Book Profits of ₹ 90 Lakh in F.Y 2018-19. Now calculate what will be XYZ’s tax liability for F.Y 2018-19? Assume the tax rate for XYZ is 30% and CESS @4%
Net Profits ₹55 Lakh. Book profits ₹90 Lakh.
Therefore Tax payable will be higher of the following two:
- Tax liability as per normal provisions is 30% of 50 Lakh plus 4% CESS i.e. ₹15,60,000;
- Tax liability as per MAT is 18.5% of 90 Lakh plus 4% CESS i.e. ₹ 17,31,000.
Thus, the company XYZ has to pay tax liability as per Section 115JB of Income Tax Act is ₹17,31,000.
⇒What is the Minimum Alternate Tax or MAT credit u/s 115JAA?
If in any financial year the taxes paid by a company under MAT exceeds the tax to be payable under the normal provisions of the Income Tax Act, the company is eligible to get MAT credit.
MAT Credit= Tax payable under MAT > Tax payable on Net Income
i.e. ₹ 17,31,000- 15,60,000 = ₹ 1,71,000.
This MAT credit is now permitted to be carried forward up to 15 Assessment Years w.e.f A.Y 2018-19 as per section 115JAA. Also, the set-off of MAT credit is permitted in a year only when if the tax becomes payable under the normal provisions of the Income Tax Act is greater than the tax payable under MAT. Maximum ceiling of MAT credit is the difference of tax payable under normal provisions on total income and tax payable under section 115JB of Income Tax Act.
In line with the above example, MAT credit can be set off up to ₹11,400 per year for 15 A.Y with a condition that the maximum amount will be lower of the ₹11,400 or the difference between the tax payable under normal income tax provision is greater than the tax payable under MAT.
⇒MAT calculation Example
Now let’s solve an example to calculate Minimum Alternate Tax.
XYZ a garment retailers company reported the following details for the F.Y 2018-19. The following information is gathered from the P&L statement.
Depreciation u/s 32 is ₹6,50,000.
Calculation of minimum ALternate Tax as per Section 115JB of Income Tax Act
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