Section 115JB of the Income Tax Act
- PRITI SIRDESHMUKH
- Dec 12
- 7 min read
Introduction
India provides corporations with a number of tax benefits, including incentives, deductions, and exemptions under Sections 10, 80, 32, and more. Companies may, however, end up with a zero-tax burden on their profits after utilising these deductions, meaning they will not contribute to the national revenue. In response, Section 115JB of the Income Tax Act in India established the Minimum Alternate Tax (MAT) system. MAT guarantees that businesses with significant book profits pay a minimum tax on their profits, even if they have no taxable income because of exemptions. The idea is straightforward: regardless of the claimed deductions, you have to pay a minimal tax if you make money.
Table of Contents
What is Section 115JB of the Income Tax Act?
In order to implement the Minimum Alternate Tax (MAT) in the nation, Section 115JB of the Income Tax Act was introduced in 1987. It was implemented to stop businesses from abusing their tax exemptions and deductions. This came after a large number of the nation's businesses reported having no tax obligations. Since the implementation of Section 115JB, no business has been able to fully avoid paying taxes; instead, they are required to pay the government a minimum of 15% of their book earnings.
Applicability of Section 115JB
Section 115JB of the IT Act imposes liability on the following entities.
Domestic Companies: Unless otherwise exempted, all resident companies—including manufacturing, trade, and non-profit trusts registered under Section 12AA—must assess MAT.
Foreign Businesses: These businesses are only subject to taxation if their revenue originates or is assumed to originate in India (for example, through a permanent establishment).
Exempt Entities: Certain SEZ units are exempt entities under specific circumstances. Businesses taking advantage of profit-linked incentives are also covered. Recently, certain international businesses have set up Indian firms to generate passive revenue.
Taxation under Section 115JB
Every company registered in India is required by Section 115JB to pay a minimum tax equal to a specific proportion of its book profits, in addition to a cess and a surcharge. Every business must pay the greater of the following sums in accordance with Section 115JB provisions:
According to the standard rules, the tax burden is calculated on the tax rate to the business taxable income. For example, businesses with a turnover of Rs. 400 crores or less has to pay 25% tax along with a surcharge and a 4% cess.
A 15% tax rate with a cess and surcharge is applied to the profits reported in the company's records to determine the tax liability.
Up until September 20, 2019, the MAT rate was 18.5%. Following that, the Indian government lowered the tax rate in an effort to give businesses tax relief. For businesses that are members of the International Financial Service Centre and generate all of their profits from convertible foreign exchange, the Minimum Alternate Tax (MAT) is 9%. The following are included in the MAT, which is payable in accordance with Section 115JB:
Income tax payable
Additional interest, if applicable
Tax on distributed income/profits
Secondary and higher education cess (SHEC)
Health and Education Cess
A surcharge, if any
Book Profits of a Company
The earnings that a business posts following modifications to the profit and loss statement created in accordance with the Companies Act of 2013 are referred to as book profits. To determine book profits for calculating MAT, you must make specific additions and deletions to a company's earnings.
Additions made to calculate book profits:
Provisions for meeting unascertained liabilities
Dividends paid during the financial year or those due but not yet paid
Dividend Distribution Tax (DDT)
Due or paid income tax
Education cess
Losses incurred by subsidiary companies
Revaluation reserve
Balances carried forward to reserves u/s 33AC
Adjustment entry for depreciation in the profit and loss account
Diminution value of assets
Deferred tax provisions
Capital gains earned from the transaction of securities
Loss of income due to the transfer of shares u/s 47
Expenses on patent royalty earnings
Interest and fees paid for the transaction of securities to foreign companies
The deductions made to arrive at book profit are as follows:
Income credited to the Profit and Loss u/s 10, 11, and 12
Withdrawals made from reserves credited to profit and loss statements
Depreciation added in the profit and loss accounts
Royalty income from patents under section 115BBF
Gains on transfer of units Section 47
Capital gains, fees, royalties, and/or interest from a foreign company
Capital gains on transfers to a business trust under the provisions of Section 47
Deferred tax charged to the Profit and Loss Statement
Notional gain from imposing charges on the carrying amount of share units of Special Purpose Vehicles (SPVs).
Profits of a sick industrial company until net profits reach zero
Loss due to transfer of share units as per the provisions of Section 47
Amount of carried forward losses/unabsorbed depreciation, whichever is lower
Steps to Calculate MAT Under Section 115JB
The following steps are followed to calculate MAT under Section 115JB of the Income Tax Act:
Step 1: Identify Book Profit
Start with net profit according to the audited financial statements.
Step 2: Make Additions
In this step, add back certain items such as deferred tax, provisions for bad debts, corporate social responsibility (CSR) expenses, dissimilar depreciation, and the income tax paid. MAT ensures that the profit calculated reflects commercial reality.
Step 3: Allow Deductions
Subtract items such as income exempt under Section 10, deductions for exports and reorganizations, and the portion of disallowed or excessive depreciation.
Step 4: Apply MAT Rate
MAT is applicable at 15% of book profit, plus health & education cess and surcharge.
Step 5: Compute Normal Tax
Calculate the standard tax liability. The final MAT liability is calculated as follows:
MAT = Higher of (Book Profit × 15%) or Normal tax liability
What is Minimum Alternate Tax (MAT) Credit?
A corporation is entitled to a MAT credit when it pays a Minimum Alternate Tax (MAT) rather than its regular tax liability because the former tax liability was higher. The amount paid by the business above and beyond its regular tax obligation is equal to the MAT credit. The corporation may claim the MAT credit in any of the subsequent years that it paid the MAT. It is crucial to remember that a business may extend the MAT credit for a maximum of 15 years before it lapses in accordance with Section 115JAA.
Compliance with Section 115JB
In order to comply with the terms of Section 115JB of the Income Tax Act, any company registered in India must take specific actions. They are as follows:
Provide a report from a Chartered Accountant (CA) attesting to the fact that the business has determined its earnings and recorded them in accordance with Section 115JB.
In accordance with Section III of the Companies Act of 2013, prepare and submit a profit and loss statement for the preceding years.
Implications of Section 115JB
The taxes of firms in India have been significantly impacted by the adoption of Section 115JB. The clause guarantees that businesses with significant profits pay their fair share of taxes, even if they have taken advantage of the Income Tax Act's numerous deductions and exclusions. Additionally, the clause has motivated businesses to keep accurate financial records and books of accounts. To prevent disagreements or legal action about the computation of book profits, businesses must make sure that their financial statements adhere to the accounting standards set forth by the Institute of Chartered Accountants of India (ICAI).
Conclusion
A crucial part of the Income Tax Act of 1961 is Section 115JB, which helps guarantee that businesses pay a minimum amount of tax regardless of the deductions and exemptions they claim. The clause can affect a company's profitability and cash flows and has a major effect on its financial statements. To properly manage their tax liability, businesses must carefully assess their MAT liability and utilise the MAT credit provisions. Companies must understand how Section 115JB affects their tax liability and make appropriate plans in light of COVID-19's effects on the economy and business climate.
Frequently Asked Questions
What is Section 115JB of the Income Tax Act?
The Minimum Alternate Tax (MAT) is covered by Section 115JB of the Income Tax Act of 1961. It applies to all Indian-registered businesses, with the exception of those involved in the production or distribution of electricity.
Which companies are covered under Section 115JB?
All Indian-registered businesses, including international businesses, are subject to Section 115JB, with the exception of those involved in the production or distribution of energy.
How is the MAT liability calculated under Section 115JB?
The MAT rate is applied to the adjusted book profit to determine the MAT liability under Section 115JB. After making specific adjustments as required by the Income Tax Act, the net profit as reported in the company's profit and loss statement is known as the adjusted book profit.
What adjustments are made when calculating the adjusted book profit under Section 115JB?
Depreciation, losses carried over from prior years, exemptions or deductions claimed by the business under the Income Tax Act, provisions made for expenses or losses not yet incurred, and deferred tax liability or asset are among the adjustments that must be made when calculating the adjusted book profit under Section 115JB.
Can MAT paid u/s 115JB be carried forward and set off against regular tax liability in subsequent years?
It is possible to carry over and deduct MAT paid under Section 115JB from regular tax obligations in later years. For 15 years after the year of payment, the MAT credit may be carried forward.
Are interest and penalty applicable if the MAT liability u/s 115JB is not paid within the due date?
Yes, if the MAT liability under Section 115JB is not paid by the deadline, interest and penalties may be imposed. The penalty can reach 50% of the unpaid MAT, and the interest rate is 1% per month or for a portion of a month.
How does Section 115JB impact the financial statements of companies?
The financial statements of businesses are significantly impacted by Section 115JB. Businesses must calculate the MAT liability and report it as a distinct line item in their financial statements.
How can companies manage their tax liability u/s 115JB?
By carefully assessing their MAT liabilities, utilising the MAT credit provisions, and strategically managing their tax payments and cash flows, businesses can efficiently manage their tax liability under Section 115JB. To properly manage their tax liability, they might also consult with tax professionals.
Is MAT applicable to companies facing bankruptcy issues?
A corporation shall receive a refund for the computation of the appropriate Minimum Alternate Tax (MAT) if it is experiencing liquidity problems under the Insolvency and Bankruptcy Code (IBC). To lower the profits in its books of accounts, for example, the value of unabsorbed depreciation and loss pushed forward may be decreased.
