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Income Tax Laws – I

Notes 5. ………………….is a tax payable by companies against benefits that is seen by employees
but cannot be attributed to them individually.
6. ……………….is deductible only through depreciation or as the basis of property in
determining capital gains or losses.

11.2 Minimum Alternative Tax (MAT)

Normally, a company is liable to pay tax on the income computed in accordance with the
provisions of the income tax Act, but the profit and loss account of the company is prepared as
per provisions of the Companies Act. 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 act net, section 115JA was
introduced w.e.f assessment year 1997–98.

Caselet Zero Tax Companies

company’s book-profit is 10 lakhs Rupees. Then they use some creative accounting
methods like depreciation, donations etc. to claim deductions and finally their
A‘taxable’ income is reduced to almost zero. In 2009 during the recession time,
Government of India launched a scheme to give 50% depreciation to commercial vehicles.
(With assumption that it’ll boost the vehicle demand and help the automobile industry to
come out of the recession.)

So the company buys a truck, for 20 lakhs rupees on loan. Their deduction on first year=
50% of 20 lakhs rupees= 10 lakhs rupees. Their taxable income = book profit minus
deductions =10 minus 10=0. So they don’t have to pay any tax on their profit at all. Other
tricks involve donating 5,000 rupees to some religious institution run by con-man and
getting donation-receipt of 5 lakhs rupees. These companies, making profit but having
zero taxable income, are known as Zero tax companies.
Source: http://mrunal.org/2011/04/economy-q-minimum-alternative-tax-mat.html
According to this section, if the taxable income of a company computed under this Act, in respect
of previous year 1996–97 and onwards is less than 30 % of its book profits, the total income of
such company is chargeable to tax for the relevant previous year shall be deemed to an amount
equal to 30 % of such book profits.

Notes Minimum Alternate Tax (MAT) is levied on companies as per section 115JB of the
Indian Income Tax Act, 1961. And it is levied on limited liability partnerships (LLPs) as per
section 115JC.

When a Company has to Pay MAT

In India, in the case of companies, if the tax payable on their taxable income for any assessment
year is less than 18.54% of their ‘book profit’(if book profit does not exceed ` 10 m),or 19.9305%

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