MAT Audit in India: Tax Department Notifies Revised Reporting Form 29B

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By Dezan Shira & Associates

India’s federal tax agency, the Central Board of Taxes (CBDT), recently notified new revisions for Minimum Alternate Tax (MAT) audit reporting under the Income Tax (22nd Amendment) Rules 2017.

The MAT is a local tax that India has levied on companies since 1987, and ensures that companies who are able to reduce their tax liability (up to zero percent) despite earning substantial book profits – due to various provisions under India’s Income-tax Act (IT), 1961 – are brought under the tax net.

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CBDT introduces revised Form 29B, mandates e-filing

The updated Form 29B for MAT Audit reporting was notified, with immediate effect, under Section 115JB on ‘Computation of Book Profits of a Company’ of the Income-tax Act.

The amendment also mandates online filing of the MAT audit report under Section 115JC of the Act, but this mechanism has yet to be launched by the CBDT.

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Application of MAT in India

MAT is applicable to all companies – except those engaged in infrastructure and power sectors. Income arising from free trade zones (FTZs), charitable activities, and investments by venture capital companies are excluded from the purview of MAT.

The MAT paid by a firm can be carried forward and set off (adjusted) against the regular tax payable during the subsequent period –subject to certain conditions.

The Union Budget for 2017-18 has extended the time limit for companies to claim MAT credit from 10 years to 15 years.

MAT exemptions for foreign firms in India

Foreign companies with income sources in India are also liable to pay MAT.

However, according to the Finance Act of 2016, the provisions of MAT will not be applicable to a foreign company, if the foreign company is a resident of a country which:

  • Has a tax treaty with India and such foreign company does not have a Permanent Establishment (PE) as defined in the relevant treaty; or
  • Does not have a treaty with India, and such foreign company is not required to seek registration under any law relating to companies.

This proposed amendment has been effective, retrospectively, from April 1, 2001, and thus, applies from the tax assessment year (AY) 2001-2002 onwards.

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Why MAT is levied in India?

A company is liable to pay tax on income computed in accordance with provisions of the IT Act, but the profit and loss account of the company is prepared as per the provisions outlined under the Companies Act, 2013 (replacing the former Companies Act, 1956).

Since the IT Act permits a large number of exemptions, deductions, and other tax incentives to business in India, some companies – despite having high book profits (profits made but not realized through a transaction, for instance, a stock or a property that has risen in value but is still being held by the investor) under the Companies Act – are able to reduce their taxable income to zero. Such companies are called zero-tax companies.

To bring such ‘zero-tax’ under the tax net, the Indian government re-introduced the concept of Minimum Alternate Tax (MAT) in 1997-98, under section 115J of the IT Act; previously it was briefly levied between 1988 and 1990.

As a result, all companies having book profits under the Companies Act of 2013 are liable to pay MAT at 18.5 percent.

Book profit is calculated using the net profit shown in the company’s statement of profit and loss (P&L) for the previous financial year, along with adjustments as prescribed by the IT Act, 1961. These adjustments have been specified on the income tax department website.

(Editor’s Note: This article is an update on the information in Tax, Accounting and Audit in India 2017-18, which provides an overview of the fundamentals of India’s tax, accounting, and audit regime. This edition of the guide includes a detailed introduction of the Goods and Services Tax (GST) that was launched on July 1, 2017, representing the complete transformation of India’s indirect taxation structure.)

 

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