Income Tax Act, Section 115JB: Minimum Alternate Tax (MAT)

Overview

The Income Tax Act's Section 115JB addresses Minimum Alternate Tax (MAT), a measure designed to make sure businesses pay a minimum amount of tax even if they qualify for a number of exclusions and deductions that would otherwise result in a zero-tax obligation. MAT was developed to use available tax deductions under the standard income tax laws to counterbalance corporations that claimed significant profits in their financial accounts but paid little or no tax.

The Minimum Alternate Tax (MAT): What is it?

Under the notion of Minimum Acceptance Tax (MAT), a business that is legally paying little or no tax because of deductions must still pay a minimum amount of tax depending on its book earnings. Companies are required under Section 115JB to determine their tax due using book earnings and pay the larger of the two:

• Normal tax responsibility determined in accordance with the Income Tax Act's ordinary rules, or
• MAT liability determined at a predetermined proportion of book profits, presently 15%.

Relevance of Section 115JB

All firms, international or domestic, having money earned or presumed to have been generated in India are subject to Section 115JB. There are, however, a few exceptions:

• Businesses engaged in the construction of infrastructure
• Businesses in the energy and electricity industries
• Exempt are foreign corporations that fall under certain categories of Double Tax Avoidance Agreements (DTAA).

MAT Computation Under Section 115JB

15% of book profits is the formula used to compute MAT (Finance Act, 2020). Book profits come from the company's profit and loss statement, which is created in compliance with Schedule III of the 2013 Companies Act. This book profit has been adjusted to reflect things like:

• Provisions for income taxes
• Provisions for deferred taxes
• Dividends made or anticipated
• Reserve transfers

Following these modifications, MAT is computed on the resulting book profits.

Formula for MAT Calculation

MAT = 15% × (Adjusted Book Profits) + Surcharge + Health and Education Cess

Example:

If a company’s book profit is ₹10 crores, the MAT liability will be:

MAT = 15% × ₹10,00,00,000 = ₹1,50,00,000

Surcharge and cess are also added to the MAT amount.

Credit for MAT

A business is qualified for MAT credit, which it can carry forward for a maximum of 15 years, when it pays tax under MAT. The excess MAT paid in previous years may be deducted from the company's normal tax liability in the current year if its regular tax liability in subsequent years exceeds its MAT liability.

Foreign Companies and MAT

If a foreign business has a permanent establishment (PE) in India, MAT also applies to them. Foreign corporations covered by the DTAA, however, are exempt from MAT if the advantages of the treaty shield them from its terms.

Significant Modifications and Adjustments

• The current MAT rate of 15% has been subject to several revisions throughout time.
• Companies that choose the new tax system under Section 115BAA or Section 115BAB are exempt from MAT as of AY 2020–21.
• The MAT credit carry-forward duration was extended from 10 to 15 years.

In Summary

Companies that benefit from a variety of exemptions and deductions are especially encouraged to contribute to the tax system by paying a minimum amount of tax, as stipulated by Section 115JB. MAT guarantees that businesses with substantial book profits are not completely evading taxes and contributes to the preservation of tax equality.

MAT is not applicable to enterprises who choose the new concessional tax system, indicating the government's intention to streamline corporate tax arrangements. Businesses should thus determine if MAT applies to them and adjust their tax strategies accordingly.

FAQs

Who is required by Section 115JB to pay MAT?

Any domestic or foreign business that is required to pay MAT under Indian tax regulations if it has taxable income and records profits under Schedule III of the Companies Act.

What is the MAT rate right now?

15% of book profits is the MAT rate.

Can you carry over your MAT credit?

Yes, you may use the MAT credit to reduce your regular tax burden in following years by carrying it forward for up to 15 assessment years.

Are businesses who choose to use the new Section 115BAA/115BAB tax system free from MAT?

Indeed, businesses who choose to use these new tax systems are not subject to MAT.

Does MAT apply to businesses based abroad?

Yes, international businesses with a permanent establishment in India, excluding protection via a DTAA.

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