A CONCEPTUAL ANALYSIS OF MINIMUM ALTERNATE TAX (MAT) by-Molshree Totla & Gauri Sharma
It is found that companies often enjoy the corporate bodies do not pay the amount of tax as per the Income Tax Act or enjoys the unfair advantage of the exemptions levied by the government in certain cases. The government is trying its best to define the boundaries of such tax payers and no individual shall gain any kind of sustainable profit. Thus, MAT is introduced for such zero paying tax companies to pay abear minimum amount. Thus, Minimum Alternate Tax (MAT) is a provision with respect to the Income Tax Act which guides and controls the limit of the exemption of tax that is availed by the companies, so a company for such purposes shall bear a minimum amount that must be paid to the government that shall be calculated on the book profit of the company. However, due to introduction of such system, the government is receiving several suggestions on such matter, so, that, Sec. 115 JB becomes much more flexible, Moreover, it has announced a formation of special committee to look into the issues associated with the payment of MAT which have made the efforts of government more comprehensive and controllable. Thus, the paper discusses the basic features, the objective and intent of the legislature to impose MAT on the companies of MAT, its method of calculation and a thorough analysis of section 115 JB of the Act.
Keywords: Income Tax, Minimum Alternate Tax, cess, direct tax, calculation of tax.
Globally, the direct tax laws incorporate various exemptions and inducements which are utilized for incentivizing employment, research or for a specific business sector. Moreover, the company form of business is considered as the most favored business as it involves large scaled production. The companies are the biggest income earning entities which avail huge tax benefits from several incentives and exemptions under law and leads to reduction in their tax liability.i Thus, to safeguard their tax base, countries such as India limit the part of deductions and exemptions, so that such companies pay a minimum amount of tax, commonly known as “Minimum Alternate Tax (MAT)”. Thus, bringing these zero taxpaying companies under the ambit of income tax law.
The Government of India emerged with this concept in 1987 which was later introduced under the Finance Act, 1988. It was later repealed in 1990 and re- introduced in 1997. Such tax shall not be applicable to any individuals, partnership firms or HUFs, or an income earned by a company from shipping and life insurance business etc.ii
MAT is a form of direct tax which is levied under Section 115JB of the Income Tax Act where all companies which maybe public, private or foreign having certain restrictions and even the companies working under SEZ are obligated to pay corporate tax which shall be equal or higher with respect to the normal course of tax liability. It shall be calculated as per the provisions of the ITA and according to rate of MAT, i.e., 15% as per the FY2019- 20 on the book profit with an addition of the cess and surcharge which previously amounted to 18.5%. However, a 9% of MAT shall be levied on such companies which are the part of International Financial Services Centrewho derive their income only from foreign exchange which shall be convertible in nature.iii
The major features of MAT consist of the aspects of book profit on which MAT is calculated, book profit is considered as the net profit earned by the company under its P& L Account whereas the MAT Credit is the concept whereby the company is permitted to claim credit of MAT over the normal tax liability in the consequent years. However, after the set off of such credit, the liability of the company shall not reduce than the liability which is mandated with respect to the provisions of MAT. Thus, the provisions of carrying forward of MAT Credit has been defined under Sec. 115JAA of the ITA.iv The other aspects of it include a submission of a MAT report in accordance with the IT rules Thus, MAT acts a measure to prevent those companies who take unlawful advantage of tax exemptions and incentives. Therefore, the authors shall discuss the provisions related to MAT in depth in the present research.
There has been variety of research done on the present research. Therefore, the work has been analyzed as follows which will be helpful for the present research-
- Sanjay Kumarv in his article thoroughly discusses the objectives, history and the provisions associated with MAT under The author avers that MAT causes significant problems and thus, he suggests MAT should be abolished with reduced incentives or there should be different legislation for corporate taxes.
Though, the article provides with comprehensive study on MAT, however, the article is based on the circumstances in 2011, such as the rate of MAT is given to be 18.5%.Moreover, reference has been made to DTA,2010 as an alternative which has now been lapsed and is still into consideration by the government.
- In Dynamic Orthopaedics (P) v. CITvithe SC had differed from various judgments (as in cases of MalayalaManorama Co. Ltd. vs. CITvii,Apollo Tyres Case) and ruled that scrutiny of P&L accounts prepared by the companies to ascertain book profit by the A.O. under MAT has still wide interpretation and such matters shall be left to a larger bench. Though the case provides a framework to address such issue but it has left the readers with ambiguities and such matter is still open to interpretation and is unresolved.
- P. Sachin and Dr. Devrajaviii in their research avers the concept of MAT and its features under various Statues. He avers that tax planning is on the complex procedure. Moreover, the government has not levied MAT on gross assets and the retention of book profits under MAT has relieved the infrastructure and capital intensive business.
Though the research is very helpful, however the research does not depict any empirical study with respect to Indian scenario. Moreover, the concept of MAT has been linked majorly to DTA, 2010 which has now been lapsed.
Therefore, the authors shall utilize the above cited literature in the present study to analyze do a conceptual analysis of MAT and study in depth the legal provisions under ITA with its components. Last but not least, the research shall deal with the issues pertaining to such tax along with suggestions.
The research objectives are as follows:
- To ascertain the significance and objective of MAT introduced by the legislature.
- To comprehend the major features of MAT and understanding the provisions in which such tax can be
- To understand the steps required to compute the value of
- To ascertain if such type of tax provides a simplified framework for the companies with zero tax liability and analyze such issues with several judgments.
OBJECTIVE OF LEVYING MINIMUM ALTERNATE TAX:
Company as a taxpayer many times take the advantage of provision under Income tax and does not pay tax for a year or reduce its tax liability even though they have generated income in that year. Finance Act, 1987 introduced MAT as the number of the zero taxpaying companies were increasing and this Tax was in effect from the assessment year of 1988-89. However, Finance Act, 1990 withdrew it and then it was reintroduced by “Finance (No. 2) Act, 1996, wef1-4- 1997”.ix Bringing “zero tax companies” into the tax net was the objective behind introducing this tax. These companies even after earning considerable book profit and being paid huge amount of dividend find a way to not pay taxes due to various incentives and concessions that are provided under the Law of Income Tax. Various changes have been brought in the provisions regarding MAT since the MAT’s introduction and as per the provisions of Section 115JB of Income Tax Act it is being levied on companies in today’s date.
FEATURES OF MAT:
Under, MAT, the concept of advanced payment of tax arises, in cases where tax liability for a particular financial year is Rs. 10,000 or more then every taxpayer falling under it’s ambit is required to pay their computed taxes in advance in accordance with the Income Tax Act, 1961. Likewise, under Section 115JB of the Act, companies are required to pay advance tax. Also, MAT is also applicable in SEZ’s which are the special economic zones as the law was modified in the year 2011 whereas per Section 115JB for payment of MAT, included the companies operating and earning profit from the business in SEZs.
MAT is calculated on the basis of the book profit earned by a company. Under Income Tax Act, book profit in reference to Section 115 JB refers to that profit which is presented in the Statement of P&L and shall be in compliance with Schedule III, Companies Act, 2013 which is calculated by doing several modifications in the profits of a company which are presented to the shareholders under Companies Act. Moreover, due to the introduction of Ind. AS in 2018, now the companies are allowed to make adjustments as per the new accounting standards under Sec. 115 JB (2A) of ITA.However, in the case of demerger of a company, if the assets and liabilities received by the company are noted at a different values of those appearing in the books of the accounts, before such demerger, any change brought in such values shall be ignored while computation the book profit of the resultant companyx .Also, the adjustments which are based on Ind. AS and GAAP principles shall be treated as ‘Other Equity’ in the Balance Sheet. Such amounts are considered as transitions amounts and the amounts which cannot be reclassified are utilized to calculate book profit equally over a time period of five years, continuing from the period when Ind. AS was adopted subjected to certain limitations.xi Last but not the least, it is the duty of every company to present a MAT report with a report that furnishes the return of income from a CA in Form-29B which certifies that book profit is calculated in respect of Sect. 115JB.xii
The other aspect associated with MAT includes availing of MAT credit by the companies. In cases where a company fulfills its tax liability according to the provision of MAT, it can claim for a credit paid over the MAT which is above the normal tax liability in the coming years which was established in the year of 1996. Therefore, in a financial year, a company computes tax on the basis of MAT and compares it with the tax generated normally from the total income, in case
where the tax under MAT is higher than the normal tax, it will pay tax as per as MAT. Thus, MAT credit is the difference between the tax paid under MAT provisions and the regular tax. Such credit shall be allowed to carry forward for a period of fifteen years which was earlier five years. However, if any subsequent year pays tax opposing with any of the provisions of the MAT, then in such cases, the company shall set off the MAT credit from the previous year to the extent of difference between the normal tax and tax under MAT considering the 15 year limit. Moreover, the MAT credit does not bear any interest which ensures that a company pays a minimum tax even in the year when MAT credit is set off.
SECTION 115JB ANALYSIS:
This section was a special provision, which was introduced with effect in 1988 which was applicable to any company whose total income was less than 30% of its book profit as computed under the Income Tax Act. It was discontinued in 1991 and was revived in 1997 as Section 115JA but it was again discontinued in 2001 and Section 115JB substituted it from the same date. It imbibes the concept of MAT.
As per this provision, the computed income tax that is payable by the company under the Income Tax’ provision is less than 15% of book profit in addition to surcharge and education cess then the book profit in respect to the previous year that is relevant to the assessment year shall be treated as company’s total income and the tax payable deemed to be 15% of book profit for the relevant previous year. This provision is considered non-absolute that overrides any other Income Tax Act’s provision. Therefore, when the payable income tax is less that 15% of Book Profit then that book profit is considered total income and payable income tax in 15% of book profit. When the assesse is located and derive the income solely from International Financial Services Centre and convertible foreign exchange respectively.
In accordance with Schedule III’s provisions of the Companies Act of 2013, the assessee is required to prepare “Profit & Loss A/c”. However, certain companies such as Electricity company, Banking or insurance company are allowed to prepare their account as per the provisions under their regulatory acts. Therefore to align such provisions (Income tax Act with the Companies Act), from assessment year 2013-14, an amendment was brought in the Section 115JB where in accordance with this provision such companies’ accounts will be taken on the basis of computing their book profit.
While preparing their annual accounts as per Schedule III that included loss and profit accounts, the company needs to make sure that the following are same that have been adopted for preparing the abovementioned account and presented before the annual general meeting of the company:
- Accounting standards that are followed for preparing the abovementioned accounts.
- Rates and method adopted for the calculation of But in that case where the financial year adopt or adopted by the company is different from the previous year as per the Income Tax Act, then the aforementioned (1), (2) and (3) shall correspond to accounting standards, accounting policies and the rates and method adopted for the calculation of depreciation that have been adopted for preparing of abovementioned accounts for that financial year or it’s part that falls within the previous year.
APPLICABILITY AND NON APPLICABILITY
If the computed Income-tax including cess and surcharge is payable on the total income in respect of any year, then as per Section 115JB, every company, as a taxpayer, is liable to pay MAT. However, the payable income tax should be less than 15% of Book profit of the company in addition to education & health cess and surcharge. But there are few companies on whom MAT provisions are not applicable which are the following:
- Domestic companies opting tax regime under Sections 115BAB and 115BAA.
- Company’s income arising or accruing from the business of Life Insurance as referred to Section
- Shipping company whose income is subjected to tonnage There are following conditions as per the Explanation 4 of the provision (amended by Finance Act, 2016 with effect from 2001), where the provisions of MAT will not be applicable on a foreign company (an assessee):
- If the assessee is a resident of a specific territory or a country with which as per the Section 90(1) of Income Tax Act, Central Government of India has an agreement or an agreement has been adopted by the Government under Section 90A(1) and there is not permanent establishment of assessee in India as per the provisions of the aforementioned
- If the assessee is some country’s resident with which there is not agreement by India of any such nature as referred in clause (i) of Section 90(1) and there no requirement under any law to seek any registration for a time being.
According to Section 115JB, Explanation 4A which was inserted by Finance Act, 2018, provisions of MAT are not applicable to those foreign company whose whole income (total) comprises of gains and profits accruing from the business as per Sections 44AB, 44BB, 44BA or 44BB and this income is already under the payable income tax as specified in these sections.
ISSUES/ CHALLANGES UNDER MAT:
Many issues surrounding Section 115JB have been a source of controversy between the Department and assessees. Some of these issues have been resolved through Act amendments or Supreme Court decisions; however, others remain contentious. Following are the issues:
- Scope of Income Tax:When firms establish provisions for taxation to be paid by their international subsidiaries under the tax rules of those nations, an unusual scenario might The question arises as to whether or not such taxes paid in foreign nations should be accounted for when calculating book profits. Because ‘income-tax’ in clause (a) does not indicate solely income-tax due in India, the AAR in the matter of Bank of India, In re AARxiii, concluded that such provision must be added back to book profits.
- Amount withdrawn from a reserve:The amount withdrawn from any reserve or provision and credited to the statement of profit and loss is to be reduced while computing book profits only if the book profit was increased by the amount of reserve in the year in which the reserve was created, according to clause (i) of Explanation-1 to Section 115JB of the Act.As a result, the A.O. (Assessing Officer) should review the P&L statement for the year in which the reserve was established. The assessee company’s P&L account should be effectively credited by the amount of reserve in the year of establishment, not only an adjustment contra entry.In the case of Indo Rama Synthetics
- vs. CITxiv, the Hon’ble Supreme Court considered this issue at length in a very well reasoned and eloquent conclusion. Every A.O. should study this decision in order to understand the principles of reserves and credits in the P&L account.
- Capital gains’ Treatment:There may be circumstances where a surplus arising from the transfer of capital assets is transferred directly to the reserves by the assessee firm without going through the P&L account. In light of the Hon’ble Supreme Court’s decision in the case of Apollo Tyres Ltd. vs. CITxv, the assessee may argue that because this transaction is not routed through the P&L account, the O. cannot make any adjustments.It is important for A.O.s to remember that even if long term capital gains are zero due to any exemption, such as the exemption under Section 54E of the Act as per the customary requirements of the Act, long term capital gains must be included when computing book profits.
- Scope of scrutiny of P&L account by the A.O.:The Hon’ble Supreme Court held in Apollo Tyres Ltd. vs. CITxvithat the A.O. has only the power to examine whether the books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act when computing the income under Section 1 15J. Following that, the A.O. has limited discretion to make changes and reductions as specified in the section’s Explanation. To put it another way, except as specified in the Explanation to Section 115J, the A.O. does not have the authority to go behind the net profit shown in the P&L But in the case of Dynamic Orthopaedics (P) Ltd. v. CITxvii, Supreme Court referred this case to a Court’s larger bench. As a result, the question of the Company’s P&L account being scrutinized is still open, and it is likely that the case will be decided by a larger Supreme Court bench.
- Arrears of Depreciation: Although the assessee has the option of using the straight line method or the WDV method for claiming depreciation under the Companies Act, the deduction of extra depreciation as arrears of previous years when computing book profit is not permitted, as the Hon’ble M.P. High Court held in the case of Gilt Pack Ltd. vs. Union of xviii
- Prior Period Expenses:The majority of the Courts believe that if past period expenses are debited in the P&L account in line with the Companies Act, then the expenses are deductible.However, if the A.O. discovers that prior period expenses were not debited in the P&L account and were instead shown in the P&L appropriation account, the A.O. should not allow these expenses to be deducted when computing book profits because the Hon’ble Supreme Court’s decision in the Apollo Tyres case applies equally to assessees.
- Applicability of Provisions of MAT on Foreign Companies:The applicability of MAT laws to foreign corporations has long been a point of contention. In rexix, the Authority for Advance Ruling in 14 of 1997 decided that a Dutch company was subject to tax on book profits. In the case of Timken Company, In rexx, the AAR concluded that the non-resident US company could not be held accountable for MAT because it had no PE in India.
- Inability to Use MAT Credit:Because of the limitations on when and to what degree a firm can use its MAT credit, it is unable to use it to satisfy regular tax For more than a decade, many companies have had unused MAT credit on their books. The numbers for taxes paid under MAT and MAT credit claimed against normal tax (by all companies) were compiled from the government’s annual budgets (which include a statement of the Revenue Impact of Tax Incentives under the Central Tax System). This illustrates that the percentage of MAT credit used by all companies (to pay their ordinary tax due) compared to taxes paid by all companies under MAT has been decreasing, and was around 14% in FY 2016-17.
As a result, the average length of “MAT credit carried forward” by companies is increasing from year to year as they are unable to use these credits to offset normal tax liabilities. The fact that the time term for utilizing these credits was extended from 5 to 7 years in FY 2006-07, to 10 years in FY 2010-11, and now to 15 years in FY 2018-19, demonstrates the difficulty that many companies are facing.Furthermore, even if these MAT credits are used to pay normal tax, the credit’s actual monetary worth is significantly reduced. Only if a MAT credit of INR 100 produced in a certain year (say FY 2000-01) is used after 10 years does its inflation adjusted value drop to INR 50. (say in FY 2011-12). If it is used after 15 years (for example, in FY 2015-16), the MAT credit is further degraded, falling to INR 37.88 in FY 2015-16.
It is not reasonable to have a MAT credit method in which the taxpayer loses more than half of the value of the MAT credit due to the extended time period before it may use it.
Allowing a corporation to use a MAT credit in its 11th year of carry forward to lower its MAT burden even if it has no regular tax liability in that year could be one solution.
CALCULATION OF MAT
As discussed, MAT is calculated at a rate of 15% of the book profit, for instance, if a XYZ company is not taking any incentive or an exemption under ITA, 1961, it is assumed that the taxable income of such company isRs. 10 Lakhs. Thus, assuming 25% of the corporation tax to ascertain the normal tax liability will amount to Rs.2.5 Lakhs with an addition of cess and surcharge. On the other hand, it is assumed that the book profit of the company under Sec. 115 JB amounts to Rs. 20 Lakh. Therefore, MAT at the rate of 15% will be Rs. 3 lakhs in addition to cess and surcharge. Since, in this case, the MAT is higher than the normal tax liability then the company shall be liable to pay Rs. 3 lakh plus cess and surcharge.xxiThus, calculation of book profit is considered as an essential aspect with respect to MAT. While calculating book profit, various numbers of costs and incomes are considered along with their deductions and additions with the Statement of Profit and Loss.xxii
Majorly, the amounts which require a key in addition in the book profits consist of the income tax which paid or payable, amounts which are carried to the reserve except those in Sec. 33AC of ITA, provisions associated with any unascertained liabilities or any loss of subsidiary companies, paid or proposed dividend or expenditures which falls under Sec. 10, 11 and 12 under ITA except expenditures in Sec. 10(38) and the incomes derived by any BOI/AOP on which no income tax is payable with respect to Sec. 86 of ITA. On the other hand, the amounts which require key deductions while calculating book profit include the amount drawn out from any reserve or any of the provisions, incomes which fall under the exceptions of Sec. 10,11 and 12 excluding the income under Sec. 10(38), any amount which is charged as depreciation under Profit and Loss A/c excluding the depreciation charged at the time of revaluation or any such amount which is drawn from the revaluation reserve but is less than the amount of such depreciation. Lastly, income earned by an individual from AOP/BOI on which there is no income tax payable which shall be in accordance to Sec. 86 of the Act.xxiii After the calculation of book profit, the basic task include levying of MAT@ 15% of the book profit and addition to surcharge if any, then addition of education cess and surcharge which leads to generation of tax liability with respect to the provisions of MAT.
CONCLUSION AND SUGGESTIONS
The law makers have noted that the companies divulge huge amount of profits in the books of accounts during the Annual General Meeting to the shareholders but on the other hand, these companies show a profit of nil value to safeguard themselves from the income tax purposes. Also, there have been several variances in the profits earned under Companies Act, 2013 and The Income Act due to different allowances in both the Act which are dissimilar in nature, for instance, different methods of depreciation followed under the Act. Thus, to restrict such ambiguities and bring such companies under the ambit to pay tax liability, the law makers have formed the concept of MAT which allows a guaranteed amount of minimum tax by these corporate entities.
Though, MAT consists of several challenges, however it also provides a flexible system which is in a form of MAT credit where the companies can avail credit over the normal tax liability. However, due to the nature of MAT, governments have faced several issues in it and have received several suggestions for the amendments with respect to the Section 115JB of ITA, so, to make it untangled. Thus, recently the government announced the formation of a special committee to resolve the disputes. However, its focus is limited to the issues arising with the foreign institutional investors and makes the payments associated with MAT more controlled and holistic.
From the present study it can be suggested that in order to rationalize the concept of MAT, there shall be a reduction in the complexities associated with the calculation of MAT such as the calculation of book profit shall be strictly aligned to the current aspect of Companies Act dealing with the profits required to be declared as divided as most of the companies often get confused in the application of the relevant provisions. Moreover, the latest system of Ind. AS shall be followed which provides with the aspects of book profit, thus, by doing the same current anomalies can be prevented. The companies shall be allowed to use the MAT credit against their tax liability. In cases where such credit is carried forward for a long period of time such as for a period of ten years, then it shall be allowed to carry the same in 11th year and utilize it against the liability of 11th year which would mean that a company might have chance to reduce the tax liability to the extent of liability under MAT in excess to its regular tax liability. Last but not least, calibrating the rate of MAT downwards as the corporate tax is brought down with 25%.As a result, the MAT rate for corporations whose ordinary tax rate has been reduced to 25% (with cess and surcharge) can be brought down at half of the rate of corporate tax which is 12.5% which will help in simplified application of MAT
iAshutoshDikshit, GokulChaudhri, JimitDevani, Pravin Agrawal, RaviratanChouhan, Sarthak Gulati,Deloitte, Minimum Alternate Tax on Companies, Challenges Forward, (October 18,2021, 6:12 AM), https://www2.deloitte.com/content/dam/Deloitte/in/Documents/tax/in-tax-minimum-alternate-companies-noexp.pdf ii Business Standard, What is MAT?, (October 19,2021,3:12 PM), https://www.business-standard.com/about/what- is-minimum-alternate-tax-mat
iv ITD,MAT and AMT, (October 19,2021,6:15 PM), https://www.incometaxindia.gov.in/tutorials/10.mat-and- amt.pdf
v Sanjay Kumar, Minimum Alternate Tax ,Manupatra, Is There Any Alternative? ( October 23,2021,9:12 PM), http://docs.manupatra.in/newsline/articles/Upload/2E0B2B2D-9E8B-4469-9F05-2F6F0CD2BD87.pdf viDynamic Orthopaedics (P) Ltd. v. CIT, 169 Taxman 471
viiMalayalaManorama Co. Ltd. vs. CIT ,169 Taxman 471
viiiH.P. Sachin and Dr. Devraja, Minimum Alternate Tax, A Comparative Study with Direct Tax Code, International Journal For Research Culture Society (Vol. I, Issue 10, Dec. 2017).
ixMAT and AMT, Income Tax Department, Mondaq (October, 21 2021 4:30 PM), https://www.incometaxindia.gov.in/tutorials/10.mat-and-amt.pdf.
xNexdigm Pvt. Ltd., Impact of Ind. AS Adoption on MAT,(October 19,2021, 8:12 PM), https://www.mondaq.com/india/corporate-tax/584348/impact-of-ind-as-adoption-on-mat
xii CA Rockey, Minimum Alternate Tax-Sec. 115JB, Taxguru (October 21,2021,10:50 AM), https://taxguru.in/income-tax/minimum-alternate-tax-mat-115jb-income-tax-act-1961.html
xiiiBank of India, In re AAR No.732 of 2006.
xivIndo Rama Synthetics (I) Ltd. vs. CIT, 196 Taxman 535.
xvApollo Tyres Ltd. vs. CIT, 122 Taxman 562.
xviSupra at Note 7.
xviiSupra at Note 6.
xviiiGilt Pack Ltd. vs. Union of India, 163 Taxman 331.
xixIn re 234 ITR 335.
xxIn re 326 ITR 193. xxi Supra at Note 4. xxii Supra at Note 1. xxiiiSupra at Note 8.
1 Students at Symbiosis Law School, Hyderabad