Every company, including foreign companies, that has tax payable on the total income for any assessment year that is less than 15% of book profit is required to pay MAT at the rate of 15% of book profit unless specifically exempted from MAT provisions.
Companies exempt from the application of MAT
Companies listed below are exempt from the provisions of MAT:
● A foreign company that is both
- A resident of a nation with which India has a DTAA and
- Does not, in line with the provisions of such DTAA, have a permanent establishment in India?
● A foreign company not required to apply for registration under Section 380 of the Companies Act is a resident of a nation with which India does not have a DTAA.
● A foreign company having a total income is made up entirely of the profits and gains from the types of businesses mentioned in sections 44B, 44BB, 44BBA, or 44BBB, and whose income has been given for taxation at the rates outlined in those sections.
● A company that has used the option provided by Section 115BAA.
● A company that has used the option provided by Section 115BAB.
● A shipping company that selected the Tonnage Tax Scheme.
● A life insurance company (LIC)
Companies that qualify for a discounted MAT rate of 9% of book profit
If the company is a "unit located in an International Financial Services Centre (IFSC) and receives its income exclusively in convertible foreign exchange," as defined by Section 115JB (7), then the company qualifies. When the tax on total income is less than 9% of book profit during an assessment year, such a company will be subject to MAT at 9% of book profit.
If taxable income is calculated using MAT, can penalties be applied for additions made in accordance with normal rules and provisions?
No penalty may be imposed under section 271(1)(c) for additions made in accordance with normal rules and provisions where taxable income is calculated under section 115JB.
Can a reassessment be started in cases where the assessee company suffered a loss and paid MAT on book profit?
When the assessee-company incurred a loss and paid tax on book profit calculated per the MAT provision, it was determined that the assessee would still be subject to section 115JB and be assessed on the same book profit after making the proposed addition to income. Therefore, reassessment could not be started since there would be no excess tax liability under the MAT provision.
Allowance of the double taxation relief when the corporation is required to pay MAT under DTAA
In the case of Deputy Commissioner of Income-tax, Circle-4 v. iGate Global Solutions Ltd., it was determined that an assessee is only entitled to a credit for foreign taxes paid to the extent of the income that was subject to double taxation, not to the full amount because that income is not included in the calculation of income under section 115JB. Therefore, the amount of foreign tax credit should be limited to the amount obtained by applying the MAT rate to the doubly taxed income if the income was subject to tax in the other nation at a rate higher than the MAT rate.
The Tribunal explained as follows after analyzing the clauses in sections 90 and 115JB:
● Relief is to be granted in relation to income on which tax has been paid in both India and the other nation, according to section 90(1)(a)(i).
● Before the Assessing Officer, the assessee admitted that the income subject to double taxation in India and other countries was worth Rs. 10.13 crore.
● With that perspective, it seems obvious that the relief required by section 90(1)(a)(i) must be limited to the amount of such double taxable income and not more.
● The assessee paid a total of Rs. 1.91 crores in taxes to foreign governments.
● The amount of income subject to double tax is Rs. 10.13 crore. This income must be excluded from the amount computed under section 115JB because the assessee's income has been calculated under section 115JB. It is not the Assessing Officer's fault that this income of Rs. 10.13 crores is not entirely included in the book profits calculated in accordance with section 115JB.
● The conclusion is that the assessee is only entitled to a credit for foreign taxes paid to the extent of the income that was subject to double tax, not to the remainder, whose equivalent income is not taken into account for calculating income under section 115JB.
● The phrasing of section 90(1)(a)(i) mentions giving relief with regard to "income" that has been double taxed. It should also be mentioned that Article 25(2) of the DTAA between India and the USA allows for the deduction of an amount from income tax equal to the amount of income tax paid in the USA.
● A combined reading of the aforementioned clauses reveals the following two points. First, the income subject to double taxation must be subtracted from the income subject to taxation in India. Any tax and surcharge owed on such double-taxed income will be automatically deducted from the total tax liability determined in accordance with the Act once it is excluded from the income computed under the Act. The second is that the Act requires any deduction from income tax obligations to be limited to the amount of income tax on such double-taxed income paid in the USA.
● The above two arguments, when applied to the factual context of the current case, inevitably lead to the conclusion that once the income that has been subject to two taxes is excluded, the foreign tax credit must be granted on that income at the rate at which that income was subject to taxation under the Act, which is 11.33 percent under section 115JB. The deduction should only be for the tax paid on double-taxed income in the other nation, though, if the amount of tax paid there is less than 11.33 percent. The Assessing Officer stated in the assessment order that the assessee had paid between 10% and 40% foreign tax rates.
● Therefore, the foreign tax credit amount should be limited to 11.33 percent of the double-taxed income in question if the income was subject to foreign tax in the other country at a rate higher than 11.33 percent (for example, 15%, 20%, or 40%). If the income was subject to foreign tax at a rate of 10%, the foreign tax credit should be limited to 10% of the income.
MAT does not apply to Indian LLPs but rather to LLPs incorporated outside of India (Foreign LLPs)
It is evident from section 2 of the Act that the definition of "company" is substantially more expansive than what is stated therein. It applies to foreign companies, statutory corporations, and Limited Liability Partnerships [LLPs] formed overseas in addition to companies registered under the Companies Act. The LLP formed in India in accordance with the LLP Act, 2008 is a "firm," not a company, and is not liable for MAT. Foreign LLP, however, shall be treated as a foreign company and responsible for MAT, unless exempted under section 115JB (2), and is a company within the definition of section 2(17)(ii).
A foreign company must comply with the MAT provisions unless exempted under Explanation 4 or Explanation 4A of Section 115JB (2) or Section 115JB(5A) (i). These exemptions expressly apply to foreign companies. All companies, whether Indian or foreign, are covered by the exemption under section 115JB(5A) (i) (applied to life insurance companies).
This section's criteria won't apply to, and shall be deemed never to have applied to, an assessee that is a foreign corporation under the following situations:
- All of its income comes from the profits and gains from its business as described in Sections 44B, 44BB, 44BBA, or 44BBB; and
- Such income has been made available for taxation at the rates laid out in those provisions.
If a foreign company is not exempt from MAT under Explanation 4A, it must be determined if it is exempt by Explanation 4 of Section 115JB (2).
According to Explanation 4, a foreign company that is an assessee is exempt from the provisions of this section and would be deemed to have never been subject to them if—
- In accordance with any agreement the Central Government has adopted under sub-section (1) of section 90A, There is no permanent establishment for the assessee in India. , or the assessee is a resident of one of the nations or specified territories with which India has an agreement as mentioned in sub-section (1) of section 90;
- The assessee resides in a nation with which India does not have a treaty of the sort mentioned in clause I and is not required to apply for registration under any company-related laws now in effect.
This change is recommended to take effect retrospectively on April 1, 2001, and apply to assessment years 2001-02 and the following years.
The foreign corporation is exempt from the provisions of this section, according to Explanation 4 to Section 115JB, if the applicant is a resident of the country with which India has an agreement under Section 90(1) and the applicant does not have a permanent residence in India according to the conditions of such an arrangement.
Income from the life insurance business is exempt from the MAT
The sub-part (5A) was added to section 115JB retrospectively to the assessment year 2001–2002 by the Finance Act of 2012. According to subsection (5A), MAT does not apply to any revenue that a firm receives from the life insurance business mentioned in section 115B.
A company paying tax u/s 115BAA or 115BAB is exempt from MAT
A person who has exercised the option mentioned under section 115BAA or 115BAB is exempt from the terms of this section (section 115JB), according to clause (ii) of sub-section (5A) of section 115JB.
Due to the nature of MAT, the government has been subject to constant criticism and a number of requests for changes to section 115JB to make it more inclusive and flexible. The formation of a special committee to look into solutions to settle disagreements regarding MAT payment has recently been announced by the Indian government. However, the committee's current mandate is constrained, and it appears that its main concern is finding a solution to the MAT requirements the government has put on foreign institutional investors. This is due to the fact that several overseas investors have received notices regarding the payment of MAT during the previous few months. To make MAT payments more comprehensive and under the control, the government is still working on this.