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Introduction:

The perception of taxes as burdensome prompts taxpayers to seek ways to minimize or eliminate their tax obligations. Yet, such endeavors are counterproductive to a nation’s growth and development.

Section 115JB of the Income Tax Act is therefore intended to prevent companies from taking advantage of tax credits excessively. Let’s delve deeper into the specifics of this article.

Section 115JB:

Section 115JB of the Income Tax Act introduced in 1987 established the concept of Minimum Alternative Tax (MAT) in the country. The move was aimed at preventing companies from taking advantage of tax exemptions and deductions unfairly, especially after many companies reported zero tax liabilities.

Since the introduction of section 115JB, no company can completely waive the tax liability; They are required to remit 15% of their book profits to the government as a minimum tax rate.

Provisions of MAT:

• According to Section 115JB, all companies, regardless of their origin (domestic or foreign), are mandated to pay a minimum tax at a predetermined rate, inclusive of surcharge and cess. In line with the MAT principle, a company’s tax liability will be calculated as the higher of the following:
• The tax is calculated at 15%, including cess and surcharges, based on the company’s book profits.
• Tax liability under the standard provisions of the Income Tax Act is determined by applying the tax rate to taxable income. For companies with gross receipts or turnover exceeding Rs. 400 crores, the tax liability stands at 25%, augmented by applicable surcharge and a 4% cess.
• Companies operating within an International Financial Services Centre and earning their entire income from convertible foreign exchange are subject to a MAT rate of 9%. Additionally, surcharge and cess are levied on the income tax.

Applicability of the Section 115JB:

• Section 115JB of the Income Tax Act applies universally to all companies registered in India, regardless of their classification as public, private, domestic, or foreign.
• Each company must provide a report from a Chartered Accountant (CA) confirming the calculation of book profits under section 115JB. Additionally, in accordance with Schedule III of the Companies Act 2013, they are required to prepare profit and loss statements for the previous year for taxation purposes.
• In addition, companies may be required to pay tax in advance in certain cases and face penalties for late Income Tax Return (ITR). Income tax rates include:
• Income tax based on annual income ,Additional interest rates ,Tax on distribution of income under section 115R or distribution of profit under section 115-O ,appropriate supplemental income ,Health and Education Cess ,Secondary and Higher Education Cess (SHEC) .

Exclusions under the Section 115JB :

• Any Indian company which has opted for tax regime under Section 115BAA or Section 115BAB
• If the taxpayer does not have a permanent establishment in the country as discussed in the preceding sections.
• Companies generating income from life insurance operations.
• If a taxpayer is a resident of a country that has an agreement with India under either Section 90(1) or Section 90A(1).
• Any shipping company whose income is solely subject to tonnage taxation.
• MAT provisions do not apply to foreign companies with income arising from businesses specified in Section 44AB, Section 44BB, Section 44BBA, or Section 44BBB.

MAT Credit: 

When a company opts to pay a Minimum Alternate Tax (MAT) instead of its regular tax liability, which may be higher, it becomes eligible to receive MAT credit. This credit corresponds to the surplus amount paid by the company beyond its normal tax liability. The company can claim this MAT credit in any subsequent year in which it has paid MAT.

It’s crucial to understand that a company can carry forward the MAT credit for up to a maximum period of 15 years, after which it expires in accordance with the provisions outlined in Section 115JAA.

Book Profits of a Company:

• As per this provision, book profits represent the actual profits adjusted against liabilities outlined in a company’s profit and loss statement from the preceding year. Specific items outlined in Schedule III of the Companies Act 2013 serve to either augment or diminish the net profits. These comprise positive adjustment items that bolster the net profits and negative adjustments that are deducted from them.
• These adjustments are debited to the profit and loss accounts for the relevant assessment year.
• Combined dividends distributed or proposed to be distributed.
• The total losses incurred by subsidiary companies.
• Correction for depreciation expenses recorded in the profit and loss account.
• The sum representing the reduction in the value of assets.
• Income or loss on allotment of shares under section 47 clause xvii.
• Funds allocated to fulfill diverse liabilities.
• Income taxes have been remitted or pending, including interest, DDT (dividend distribution tax), and education cess.
• Amount transferred to any reserve as per Section 33AC.
• capital income from securities transactions and interest/fees on technical services provided by foreign companies.
• Expenses linked to the incomes of BOI (Body of Individuals) or AOP (Association of Persons), which are tax-exempt under Section 86.
• Expenses associated with earnings derived from patent royalties.
• Income included in the P&L report to which the provisions of Section 10, Section 11 and Section 12 apply.
• Income generated from patent royalties, subject to applicable tax under Section 115BBF.
• Benefits of capital transferred to employee trust under Section 47 .
• The lower of the amount of losses carried forward or unabsorbed depreciation.
• The profits of a patient technology firm are considered fair as long as its net profits remain zero.
• Loss from transfer of share units as described in section 47 .

Impact of Section 115JB:

• Section 115JB profoundly influences the financial statements of companies. They are required to calculate the MAT liability and present it as a distinct line item in their financial statements. Failure to settle the MAT liability by the due date may incur interest and penalties, consequently augmenting the tax burden on the company.
• Companies that enjoy greater exemptions and deductions under the Income Tax Act may find that their MAT payments exceed their tax liability. This situation could increase the company’s tax liability, thereby affecting its profitability and cash flow.

Conclusion:

A key provision in the Income Tax Act, 1961, Section 115JB, ensures that companies pay minimum tax rate, irrespective of withholding tax deductions and exemptions. This process significantly affects companies’ financial statements and can affect their profits and earnings. Companies should therefore carefully consider their MAT obligations and use the MAT credit facility to manage their tax liabilities efficiently.