Section 115JB of the Income Tax Act: A Comprehensive Guide on Minimum Alternative Tax (MAT)

Taxpayers often perceive their tax liabilities as a burden and, thus, they consistently tend to seek methods for reducing their tax obligations. However, this trend does not directly align with the country’s development and growth. Hence, the Government has passed Section 115JB of the Income Tax Act to restrict businesses from misusing the tax benefits offered to them. Let’s gather knowledge about this section in the following segments. 

What is Section 115JB of the Income Tax Act?

To put in place the concept of Minimum Alternate Tax (MAT) in India, the tax department introduced Section 115JB of the Income Tax Act in 1987. Its role is to prevent businesses and corporate bodies from taking undue benefits of the allowed tax exemptions. This proposition was implemented after many companies were found to be skipping tax payments by reporting zero liabilities.

After the establishment of Section 115JB, all companies are required to pay a minimum of 15% of their book profits as tax, and cannot completely avoid their tax liabilities. 

Applicability of Section 115JB of the IT Act

One can observe the applicability of 115JB of the Income Tax Act in all companies registered in India. Whether it be a private company, a public company, a domestic or even a foreign company, the section guidelines will be applicable to all of these entities. 

As a matter of fact, from 2011, companies that earn profits through Special Economic Zones (SEZs) also come under the purview of Section 115JB. 

What is the Tax Amount to be Paid According to the Rules of Section 115JB?

According to the 115JB of the Income Tax Act calculation, a company’s tax payment will be determined based on:

• Tax decided on the total income based on the regular guidelines of the Income Tax Act of 1961
• Tax computed at the rate of 15% on book profit combined with cess and surcharge, as applicable

Any one of the above-mentioned determinants will be picked to compute the tax liability of a company under MAT (whichever is greater). 

What is Meant by the Book of Profit?

When going through Section 115JB, you can come across the term 'book profit' described in Explanation 1. It signifies the total profit as declared in a business's profit and loss account for the previous financial year and as decreased or increased by selected prescribed transactions. 

To make it simple, you can calculate book profit by fetching a profit and loss account and bringing some voluntary deletions and additions to it. 

The list of deductions to be made to calculate the book profit is provided below:

• Credited income to the business’ profit and loss account u/s 10, 11 and 12
• Depreciation amount accounted for in the profit and loss calculation
• Withdrawals processed from any reserves or provisions mentioned in profit and loss statements
• Royalty income gained from a patent as per Section 115BBF
• Interest, fees or capital gains earned from a foreign business
• Profit made from the transfer of units under Section 47
• Capital gains secured by transferring funds to a business trust as per Section 47 of the IT Act
• Notional profits made by levying charges on the shared units of SPVs or Special Purpose Vehicles
• Deferred tax calculated on the Profit and Loss statement
• Profits made by a sick industrial corporate entity till the point its net profit turns to zero
• Loss caused by transferring shared units under Section 47
• Value of unabsorbed depreciation/carried forward losses (whichever is lower)

Besides the deletions, the following additions also help to arrive at book profits: 

• Paid income tax or due income tax 
• Dividend distribution tax (DDT)
• Dividends received during a financial year or the ones that are due but yet not settled
• Provisions executed to meet unascertained liabilities
• Education cess
• Losses faced by the subsidiary companies
• Deferred tax
• Diminution value of assets
• Revaluation reserve
• Adjustment notes for depreciation reflected on the P&L account
• Balances carried forward to reserves u/s 33AC
• Loss of income caused by transfer of shares
• Capital gains secured by virtue of transaction of securities
• Expenses made on patent royalty earnings
• Fees and interest paid towards foreign companies to manage transactions of securities

It is crucial to note that if a foreign company earns income from a business as specified in Section 44B, 44BB, 44BBA or 44BBB, then it is liable to pay taxes at the rates stipulated in those respective sections.

Final Word

As mentioned, Section 115JB of the Income Tax Act was originally proposed to ensure that businesses pay a "minimum" tax amount to the Indian government. Businessmen can decide to carry forward their MAT liability for a particular assessment year when they find the regular tax obligations to be more than the actual MAT liability. 

On the other hand, if you want to significantly outpace the effects of income tax deductions, you can instantly book a digital fixed deposit through Stable Money. For detailed information about the best short term FD rates across India, consider exploring our mobile app now!