Section 115JB of Income Tax- Amended in Budget 2016, Budget 2016 has amended the existing Section 115JB – popularly known as MAT provision where MAT refers to Minimum Alternative Tax. The purpose of this provision is to ensure that the company won’t be able to avoid or divert the tax by diverting the profits which will lead to book profits but no or little taxable income. This article will present to the existing provision, the amendment by Budget 2016 and will try to summarize the causes and effects of such amendment.

Existing provision of section 115JB

Section 115JB is for the company ,if tax payable calculated as per Income Tax Act is lesser than 18.5% of book profits calculated as per MAT provisions (as per section 115JB), then the book profits so calculated shall be considered as total income for the company. In such a case , tax will be calculated @ 18.5% on book profits. This provision is also applicable to foreign companies where such company has a permanent establishment (PE) in India, which would require business and economic connection of the company within India.

Amendment by the Budget 2016

The Income Tax Act is amended to effect following provisions under section 115JB , where this section would not be applicable to

FII (Foreign Institutional Investors) or FPIs(Foreign Portfolio Investors)

These are relieved from applicability of MAT provisions.

Companies located in International Financial Services Centre

If such a company earns its revenue only in convertible foreign currency , then such company is allowed to pay MAT @ 9%

Foreign company

If the foreign company satisfied one of the following criteria

  1. Where the foreign company is resident of a country , which has DTAA (Double Tax Avoidance Agreement) with India under section 90 or 90A. In such case , such foreign company does not have PE in India as per the terms of such DTAA.
  2. Or where the foreign company is resident of the country , not having any DTAA with India.However, in such case,the foreign company should not be required to obtain registration under section 592 or section 380 of the Companies Act 2013.

Causes and effects of amendment in Section 115JB by Budget 2016

A committee for Direct tax matters , made a recommendation to amend section 115JB to the effect of non applicability of the same to FII and FPI , due to the fact that many FIIs and FPIs don’t have PE or place of business in India.Also mentionable fact was that such FIIs and FPIs were covered under section 115AD , hence the application of MAT would have been a double burden on them.

Alteration of the section to not apply to FIIs and FPIs, is a major step which is expected to bring back the confidence in the stock market by attracting them to enter and actively participate in the stock markets.

However the committee did not address issues regarding MAT applicability to foreign company , which left the entire lobby into hest.This could have impacted negatively on the stock market and economy as a whole, had they decided to withdraw from Indian Market due to such vital step.Hence the section was further revised to exempt foreign company which don’t have business place in India or who are not obliged to register under any relevant law.This amendment is said to have a positive impact on investors.

CONCLUSION

With India paving its way to success in international market , for being a progressive and safe country for investing with revised FDI norms , this amendment to 115JB can be hoped to attract more foreign investment.

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