Page 122 - DCOM508_CORPORATE_TAX_PLANNING

Unit 5: Computation of Taxable Income of Companies

profits as per their profit and loss account but were not paying any tax because income computed Notes
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 Minimum Alternative Tax and Zero Tax Companies
A
company’s book-profit is 10 lakhs Rupees. Then they use some creative accounting
methods like depreciation, donations etc. to claim deductions and fi nally their
‘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 profi ts.

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.

5.2.1 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%

of book profit (if book profi t exceeds ` 10 m), an amount equal to 18.54% of the book profi t

(if book profit does not exceed ` 10 m) or 19.9305% of book profit (if book profi t exceeds ` 10 m)

is regarded as their tax liability.
The tax so paid could be carried forward and set off against normal tax (in excess of MAT for that
year) of future years up to ten years but from the financial year 2010-11 said carry forward shall

not apply to a limited liability partnership which has been converted from a private company or
unlisted public company.

Did u know? MAT is applicable in respect of Export Oriented Unit Schemes (EOU) but not
Special Economic Zones (SEZ).

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