Section 115JB: 2023 Guide on Section 115JB of the Income Tax Act
Payment of taxes is often considered a burden and taxpayers look for ways to minimise or do away with their tax liability. However, this is not in the interest of a nation’s growth and development.
Therefore, we have Section 115JB in the Income Tax Act to prevent companies from taking undue advantage of tax deduction benefits available to them. Let us read about this section in detail further.
What is Section 115JB of the Income Tax Act?
Section 115JB of the Income Tax Act was introduced in 1987 to establish the concept of Minimum Alternate Tax (MAT) in the country. It was introduced to prevent companies from taking unfair advantage of the tax exemptions and deductions available to them. This was after many companies in the country had posted zero tax liabilities.
Since the introduction of Section 115JB, no company can completely do away with their tax liability, they must pay 15% of their book profits as the minimum tax to the government.
Applicability of Section 115JB
Section 115JB of the Income Tax Act applies to all companies registered in India, be it a public company, a private company, a domestic company, or a foreign company.
In fact, since 2011, Section 115JB is also applicable to companies which are earning profits in the Special Economic Zones (SEZs).
Taxation under Section 115JB
As per Section 115JB, every company registered in India needs to pay a minimum tax equivalent to a certain percentage of their book profits along with a cess and a surcharge.
According to the provisions of the Section 115JB, every company needs to pay the higher of the following amounts as their tax liability –
- The tax liability is computed by applying the tax rate on their taxable income as per the normal provisions of the Income Tax Act. For instance, companies which post a turnover of ₹400 Crores or less need to pay tax at the rate of 25% along with a surcharge and 4% cess.
- The tax liability is calculated by applying a tax rate of 15% with a cess and surcharge on the profits mentioned in the company’s books.
The MAT rate was 18.5% until September 20, 2019, after which, the Government of India reduced the tax rate in a bid to provide tax relief to the companies.
The Minimum Alternate Tax (MAT) for companies, which are a member of the International Financial Service centre and earn all earnings from convertible foreign exchange, stands at 9%.
The MAT, payable as per the provisions of Section 115JB, comprises the following –
- Payable income tax
- Additional interest, if applicable
- Tax liability on distributed income/profits
- Health and Education Cess
- Secondary and higher education cess (SHEC)
- A surcharge, if any.
The companies also need to pay an advance tax if required.
What is Minimum Alternate Tax (MAT) Credit?
When a company pays a Minimum Alternate Tax (MAT) instead of its normal tax liability (due to the former tax liability being higher), the company becomes eligible to receive a MAT credit. The MAT credit is equivalent to the amount paid over and above the normal tax liability by the company. The MAT credit can be claimed by the company in any of the following years in which the MAT was paid by it.
It is important to note that a company can carry forward the MAT credit to a maximum period of 15 years, after which it becomes lapsed as per the provisions of Section 115JAA.
How do companies comply with Section 115JB?
Every company registered in India needs to follow certain steps to comply with the provisions of Section 115JB of the Income Tax Act. They are as follows –
- Submit a report from a Chartered Account (CA) confirming that the company has calculated its profits and booked the same in its records as per the provisions of Section 115JB.
- Prepare and submit a Profit and Loss Statement for the previous years following Section III of the Companies Act 2013.
Meaning of Book Profits of a Company
The book profits of a company refer to the profits posted by the entity after making adjustments to the profit and loss account prepared as per the Companies Act, 2013.
You have to make certain additions and deletions to the profits of a company to arrive at book profits for computing MAT.
Following additions are to be made to arrive at book profits.
- Provisions made for meeting unascertained liabilities
- The dividends paid during the financial year or those that are due but not yet paid
- Due or paid income tax paid liability
- Dividend Distribution Tax (DDT)
- Education cess
- Losses incurred by subsidiary companies
- Balances carried forward to reserves under section 33AC
- Adjustment entry for depreciation posted to the profit and loss account
- Revaluation reserve
- Diminution value of assets
- Deferred tax
- Deferred tax provisions
- Loss of income due to the transfer of shares under Section 47
- Capital gains earned due to the transaction of securities
- Interest and fees paid to foreign companies for the transaction of securities
- Expenses incurred on patent royalty earnings
Following deductions are to be made to arrive at book profit-
- Income credited to the Profit and Loss under Section 10, Section 11, and Section 12
- The depreciation amount added in the profit and loss accounts
- Withdrawals made from any provisions/reserves credited to profit and loss statements
- Royalty income earned from patents under section 115BBF
- Capital gains, fees, royalties, and/or interest earned from a foreign company
- Gains earned on transfer of units Section 47
- Capital gains earned by making transfers to a business trust under the provisions of Section 47
- The notional gain made from imposing charges on the carrying amount of share units of Special Purpose Vehicles (SPVs).
- Deferred tax charged to the Profit and Loss Statement
- Loss incurred due to transfer of share units as per the provisions of Section 47
- Profits of a sick industrial company until its net profits become zero
- Amount of carried forward losses/unabsorbed depreciation, whichever is lower in value
Frequently Asked Questions
What Happens If A Company Fails to File ITR in Time?
A penalty may be imposed on the company if a company does not file the Income Tax Return (ITR) in due time.
What is the difference between Minimum Alternate Tax (MAT) and Alternate Minimum Tax (AMT)?
Minimum Alternate Tax (MAT) is only applicable for companies registered in India, including both domestic and foreign companies, at a rate of 15%. However, Alternate Minimum Tax (AMT) is applicable for all types of taxpayers in India, be it an individual, company, HUF, partnership firm, an Association of Persons (AOP), or a Body of Individuals (BOI) earning an annual income of ₹20 Lakhs or above.
Is MAT applicable to companies facing bankruptcy issues?
If a company is facing liquidity issues under Insolvency and Bankruptcy Code (IBC), then it must be provided with some rebate for the calculation of the applicable Minimum Alternate Tax (MAT). For instance, the value of unabsorbed depreciation and loss brought forward can be reduced to reduce the profits in its books of accounts.
What is Health and Education Cess?
The Health and Education Cess is a charge levied by the Central Government over and above the tax in a bid to promote the development of the health and education sector in the country. It is levied at a rate of 4% and was introduced in the year 2018 as a replacement for the 3% Secondary and Education Cess.