Normally, a company is liable to pay tax on the income computed in accordance with the provisions of the Income-tax Act, 1961 but the profit and loss account of the company is prepared as per the provisions of the Companies Act, 1956. 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. In order to bring such companies under the Income-tax net, the concept of Minimum Alternate Tax was introduced. Further, MAT takes care of Govt. revenue in the cases of companies earning huge profits and distributing dividends but paying very less taxes by enjoying several exemptions and benefits under I.T. Act, 1961.
Section 115 JB- Minimum Alternate Tax-
Where in case of an assessee being a company (whether private or public), the income tax payable on total income as computed under the I.T. Act in any previous year is less than 18.5% on its book profit then such book profit shall be deemed as total income(and not only business income but the total income) of the company and income tax payable for the concerning previous year would be 18.5% of such book profit.
For Instance- Sun Ltd. Total Income as per IT Act is Rs. 10 Lacs. Its book profit is Rs. 45 Lacs.
In this case tax payable on total income = 10, 00,000*30.9% =Rs. 309,000. Whereas 18.5% of book profits = Rs. 45,00,000*18.5% =Rs. 832,500. Here we see that tax payable on total income i.e. Rs. 309,000 is less than 18.5% of book profits, in such a case the total income is deemed to be Rs. 45,00,000(i.e. book profits) and 18.5% on the same is tax payable on the same.
Meaning of Book Profits –
For the purpose of this section book profit means the net profit as shown in the profit and loss statement of the company adjusted by the Explanations to Sec 115JB (and such P&L Statement to be prepared strictly in accordance with the Schedule VI as applicable to the company with due compliance to applicable Accounting Standards as prescribed by ICAI).
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Net Profit as per P&L Account |
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Add: Net Profit to be increased by the following Amounts as per Explanation 1 to Section 115 JB |
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1.The amount of Income Tax paid or payable/provided , if any debited to P&L A/c(including TDS, TCS, Advance tax or Dividend Distribution Tax) |
xxxx |
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2. The Amount transferred from P&L to any reserve except transfer to reserve specified under section 33AC |
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3. The Amount set aside to meet as provision for unascertained liabilities (the Amount set aside for meeting ascertained liabilities will not be added back). Unascertained liabilities are as good as contingent liabilities |
xxxx |
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4. The Amount set aside for provision for losses of subsidiaries |
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5. The amount of dividends proposed or paid (Proposed in case of Final dividend and paid in case of Interim dividend) |
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6.The amount of expenditure(if any debited to P&L) incurred in relation to any income exempt under section 10 , except section 10(38) |
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7. The amount of depreciation debited to P&L |
Xxxx |
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8.Provision for Deferred Tax |
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9. The Amount set aside as Provision for diminution in the value of any Asset |
Xxxx |
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Less: Net Profit to be reduce by the following amounts as per Explanation 1 to Section 115JB and section 115 JB(6) |
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1. Any Amount transferred from any reserve to P&L |
Xxxx |
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2. The Amount of Income which is exempted u/s 11 or 12 or 10 ( other than section 10(38)) |
Xxxx |
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3. The Amount of Losses brought forward or Unabsorbed Depreciation, whichever is less as per books of Accounts |
Xxxx |
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4. The Amount of profit of Sick Industrial Undertaking |
Xxxx |
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5. The Amount of Depreciation claimed on books except depreciation on revalued assets. |
Xxxx |
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6. The amount withdrawn from revaluation reserve and credited to the profit and loss account. |
Xxxx |
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7. Amount credited to P&L as Deferred Tax Asset |
Xxxx |
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Book Profits |
xxxxxx |
Sec 115 JAA – MAT Credit-
MAT Credit = Tax payable on Total Income -18.5% of Book Profits (MAT) for the concerning AY.
Such MAT credit can be utilized in the AY when the regular tax becomes payable on Total Income (because of Regular tax > MAT). MAT credit can be carried forward to next 10 AYs , it means if the credit cannot be utilized up to next 10 AYs then the same is lapsed.
For Instance – MAT credit b/f from previous AYs = Rs. 523,000, Tax payable on total Income (regular Income Tax) = Rs. 626,000, MAT Payable = Rs. 400,000 In this case the Net tax payable to Govt. would be = Rs. 626,000- (626,000-400,000)= Rs. 400,000 where (MAT credit utilized =RS. 200,000 i.e. 626,000-400,000).
Accounting for Taxation in MAT scenario:
1st Assessment Year
(Figures taken from example discussed in Sec 115JB, see above)
1. Income Tax (under Indirect Exps.) Dr. 309,500
To Provision for Income Tax (under duties taxes) 309,500
(Being Tax on Total Income debited to Income tax A/c)
Assume TDS Receivable for that year = Rs. 95,000, Advance Tax =Rs. 100,000
2. MAT Credit(current asset): Dr. 832,500
To TDS Receivable: 95,000
To Advance Tax: 309,500
To Bank(Self Assessment Tax): 428,000
(Being MAT paid through prepaid taxes and Self assessment Tax)
3. Provision for Income Tax: Dr. 309,500
To MAT Credit: 309,5000
(Being Provision for Income Tax written off)
So Balance in MAT A/c = 832500-309500 = Rs. 523,000 Dr. is MAT credit which will be shown under Short Term Loans & Advances under the Assets side of the Balance sheet
Next AY
Assume, Tax payable on Total Income = Rs. 626,000
MAT Payable = Rs. 400,000
So, MAT credit = Rs. 626,000-400,000 = Rs. 226,000
1. Income Tax: Dr. 626,000
To Provision for Income Tax: 626,000
(Being Tax on Total Income debited to Income tax A/c)
2. Provision for Income Tax: Dr. 626,000
To MAT Credit: 226,0000
To Bank: 400,000
(Being Self Assessment tax paid by utilizing MAT credit and balance in cash)
***It is assumed that this time there is no TDS receivable and no Advance Tax.
So, balance MAT credit to be carried forward (to be shown in Assets side of B/s under Short term Loans & Adv) = Rs. 523,000-226,000 =Rs. 297,000
With this discussion I finish my Article, but will discuss some advance and typical things in MAT in the next Article very soon.
Any sort of queries, comments and suggestions are heartily welcomed.
Saurabh Maheshwari
CRO0310510, Ahmedabad
Email: Saurabhchokhra92@gmail.com
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