Minimum alternate Tax

Parvesh Aghi

Taxation of Corporate
Company whether Indian or foreign is liable to taxation, under the Income Tax Act,1961 However, for the purpose of taxation, companies are broadly classified as:-

Domestic company [Section 2(22A)]:- means an Indian company (i.e. a company formed and registered under the Companies Act,1956) or any other company which, in respect of its income liable to tax, under the Income Tax Act.

Foreign company [Section 2(23A)] :- means a company whose control and management are situated wholly outside India, and which has not made the prescribed arrangements for declaration and payment of dividends within India.

Minimum alternate Tax

Normally, a comapny is liable to pay tax on the income computed in accordance with the provisions of the income tax Act, but the profit and loss account of the company is prepared as per provisions of the Companies Act. There were large number of companies who had book profits as per their profit and loss account but were not paying any tax because income computed as per provisions of the income tax act was either nil or negative or insignificant.

In such case, although the companies were showing book profits and declaring dividends to the shareholders, they were not paying any income tax. These companies are popularly known as Zero Tax companies. Inorder to bring such companies under the income tax act net, section 115JA was introduced w.e.f assessment year 1997-98.

According to this section, if the taxable income of a company computed under this Act, in respect of previous year 1996-97 and onwards is less than 30 % of its book profits, the total income of such company is chargeable to tax for the relevant previous year shall be deemed to an amount equal to 30 % of such book profits.

MINNIMUM ALTERNATE TAX (SEC 115 JB

Section 115 JB regulates the provisions regarding MAT
SECTIO N 115 JA Applicability When these provisions are applicable 1997-2001 Consequences

If income under normal 30% of book provisions is lower than 30% profits shall be of book profits deemed as income If the tax liability of a company under normal provisions is lower than 18% of book profit Book profit shall be deemed as total income and 18 % should be deemed as tax liability

115JB

2001-02 onwards

Procedure for Computation of MAT

The MAT tax liability under section 115JB can be worked out by undergoing the following steps:1. 2. 3. 4. 5. Compute the total income of the company (ignoring the provisions of u/s115JB). Compute the income-tax payable on total income as worked out under (i) above. Work out the Book Profit under the provisions of section 115JB. Calculate 18 % per cent of book profit (as per provisions of section 115JB). MAT tax liability as worked out under (iv) above would be the tax payable if it is more than the amount of tax worked out (ii) above.

TAX LIABILITY OF A COMPANY

COMPUTATION 1 UNDER NORMAL PROVISIONS Step 1 Step 2 Step 3 Step 4 Step 5 Step 6 Step 7 Find out the taxable income under normal provisions Find out income tax at the @ 30 %( 40% incase of a foreign company) of the income computed under (1) Add surcharge at the rate of 7.5% of 2 (2.5% in case of Foreign company) if the net income exceeds Rs 1 crore Find (2) +( 3) Add education cess at the rate of 2 % of ( 4) and higher education cess at the rate of 1% of (4) Deduct tax rebate or tax credit under section 86, 90 , 90A and 91 F Find out (4) +(5)-6

TAX LIABILITY OF A COMPANY

COMPUTATION 1 UNDER MINIMUM ALTERNATE TAX Step 8 Step 9 Find out the Book Profit Find out 18 % of the Book Profit

Step 10

Add surcharge at the rate of 7.5% of 2 (2.5% in case of Foreign company) of (9) if the book profits exceeds Rs 1 crore
Find (9) +( 10) Add education cess at the rate of 2 % of ( 4) and higher education cess at the rate of 1% of (11) Find out 11 +12 Tax liability of a company is (7) or (13) whichever is more

Step 11 Step 12

Step 13

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A numerical illustration:ABC Ltd. had its computed total income at Rs.200 lakhs and its book profit as computed under section 115JB is Rs.600 lakhs. In such an event, the following would be the calculation of MAT tax liability under section 115JB for assessment year 2011-2012 as discussed above :

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A numerical illustration:1 2 Taxable income under normal provisions 33.22% of total income being tax payable (30%+7.5% +3%Cess) Rs.200 lakhs Rs 66.44 lakhs

3 4

Book Profit 19.93% of the Book Profit (18%+7.5%+3% Cess)

Rs.600 lakhs Rs 119.58 lakhs

Income tax payable under MAT (since higher than tax on total income at (ii) above)

Rs 119.58 lakhs

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Computation of Book Profit :Book profit means the net profit as shown in the profit and loss account (prepared in accordance with the provisions of Part II and Part III of the sixth schedule to the companies Act ) is to be increased by the following amounts if debited to profit and Loss account :
POSITIVE ADJUSTMENTS 1 2 3 Amount of income-tax paid or payable, Amounts carried to any reserves, Amount set aside to provisions made for meeting liabilities, other than ascertained liabilities;

4
5 6 7 8

Amount by way of provision for losses of subsidiary companies

Amount of dividends paid or proposed Amount of expenditure relatable to any exempt income Amount of depreciation (see note... ) Amount of Deferred Tax
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NEGATIVE ADJUSTMENTS 9 10 11 Amount withdrawn from any reserve or provision Incomes Exempt from Tax Depreciation debited to the profit and loss account (excluding the depreciation on account of revaluation of assets) Amount withdrawn from revaluation reserve credited to profit and loss account . Amount of loss brought forward or unabsorbed depreciation, whichever is less as per books of account

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13

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Amount of deferred tax , if any such amount is credited to profit and loss account.

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EXPLANATIONS
Depreciation Depreciation debited to profit and loss account shall be added back . However ,depreciation ( not being depreciation which arises because of revaluation of assets ) shall be deducted as given in (11)

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CASE STUDY
X Ltd , a closely held Indian company is engaged in the business of manufacture of chemicals goods ( value of plant and machinery owned by the company is Rs 55 lakh) . The following information's for the financial year 2010 -11 are given below: X Ltd is engaged in business of manufacture of garments

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1 2 3

Sale proceeds of goods ( domestic sale) Sale proceeds of goods ( export sale ) Amount withdrawn from general reserve (reserve was created in 1996-97 by debiting P &L account) Amount withdrawn from revaluation reserve TOTAL Less Expenses

22,23,900 5,76,100 2,00,000

4 5

1,50,000 31,50,000

6 7

Depreciation ( Normal) Depreciation ( extra depreciation because of revaluation) Salary and wages Wealth tax Income tax

6,16,000 2,70,000

8 9 10

2,10,000 10,000 3,50,000

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11 12 13

Outstanding custom duty not paid as yet Proposed Dividend Consultation fee paid to tax expert

17,500 60,000 21,000

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Other expenses NET PROFIT

1,39,000 14,56,500

For the tax purposes , the company wants to claim the following : Deduction under section 80 IB ( 30% of Rs 14,56,500) Depreciation under section 32 5,36,000

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THE COMPANY WANTS TO SET OFF THE FOLLOWING LOSSES AND ALLOWANCES

For Tax purposes

Brought forward loss of 2002-03 Unabsorbed Depreciation 14,80,000

For accounting purposes

4,00,000 70,000

COMPUTE THE NET INCOME TAX LIABILITY OF X LTD FOR THE ASSESSMENT YEAR 2010-11 ASSUMING THAT X LTD HAS A (DEEMED) LONG TERM CAPITAL GAIN OF RS 60000 UNDER PROVISO (I) TO SECTION 54 D(2) WHICH IS NOT CREDITED TO PROFIT AND LOSS ACCOUNT

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Net profit as per Profit and Loss Account ADD Excess Depreciation Rs 616000-+2700005,36,0000 Wealth Tax

14,56,0000 3,50,000 10,000

Income tax
Custom Duty which is not paid

3,50,000
17,500

Proposed Dividend
Total Less Amount withdrawn from reserve 2,00,000+1,50,000 BUSINESS INCOME Less Unabsorbed loss Business Income

60,000
22,44,0000 3,50,0000 18,94,0000 14,80,000 4,14,0000

Long term capital Gain

GROSS TOTAL INCOME

60,000
4,74,000
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GROSS TOTAL INCOME less Deduction under section 80 IB(30% of Rs 4,14,000 Net Income Tax liability ( under normal provisions) 20% of Rs 60000 + 30% of Rs 2,89,800 plus 3% cess

4,74,000 1,24,200 3,49,800 1,01,910

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BOOK PROFITS AND MAT

Book Profit Add Depreciation 6,16,000+2,70,000 Income tax Proposed dividend less Amount withdrawn from reserve Unabsorbed depreciation Depreciation normal Amount withdrawn from revaluation reserve Book profit Tax liability 18.54% 14,56,500 8,86,000 3,50,000 60,000 2,00,000 70,000 6,16,000 1,50,000 17,16,500 3,18,240

X Ltd will pay Rs 3,18,240 as tax for assessment year 2011-12 as per section 115. tax credit is however available in respect of excess tax ( i.e Rs 2,16,330) under section 115

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A new tax credit scheme is introduced by which MAT paid can be carried forward for set-off against regular tax payable during the subsequent ten year period subject to certain conditions, as under:When a company pays tax under MAT, the tax credit earned by it shall be an amount which is the difference between the amount payable under MAT and the regular tax.

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Regular tax in this case means the tax payable on the basis of normal computation of total income of the company. MAT credit will be allowed carry forward facility for a period of ten assessment years immediately succeeding the assessment year in which MAT is paid. Unabsorbed MAT credit will be allowed to be accumulated subject to the Ten year carry forward limit.
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In the assessment year when regular tax becomes payable, the difference between the regular tax and the tax computed under MAT for that year will be set off against the MAT credit available. The credit allowed will not bear any interest.

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