imposition of Minimum Alternate Tax (MAT) and Alternate Minimum Tax (AMT) on various classes of taxpayers : Clause 206(1) of the Income Tax Bill, 2025 Vs. Section 115JA of the Income-tax Act, 1961

Clause 206 Special provision for minimum alternate tax and alternate minimum tax.

Income Tax Bill, 2025

1. Introduction

Clause 206(1) of the Income Tax Bill, 2025 (hereinafter "Clause 206(1)") introduces a comprehensive framework for the imposition of Minimum Alternate Tax (MAT) and Alternate Minimum Tax (AMT) on various classes of taxpayers, including companies, co-operative societies, and other persons. This provision is a successor to and substantial evolution of the erstwhile Section 115JA of the Income-tax Act, 1961 ("Section 115JA"), which was the first statutory codification of the MAT regime in India, applicable to companies for a specified period (assessment years 1997-98 to 2000-01).

The MAT regime was conceptualized to address the issue of "zero tax companies," i.e., companies that, despite having substantial book profits, paid little or no tax due to various deductions and exemptions available under the Act. Section 115JA sought to ensure that such companies contributed a minimum amount of tax based on their book profits. Over the years, with evolving business practices, accounting standards, and policy objectives, the MAT/AMT framework has undergone significant changes, culminating in the elaborate provisions proposed in Clause 206 of the Income Tax Bill, 2025.

This commentary undertakes a detailed analysis of Clause 206(1), its objectives, mechanism, and practical implications, followed by a comparative evaluation with Section 115JA, highlighting key similarities, distinctions, and policy rationales.

2. Objective and Purpose

2.1 Legislative Intent behind Clause 206(1)

The primary objective of Clause 206(1) is to ensure that all taxpayers, especially those availing of substantial deductions, exemptions, or incentives under the Income Tax Act, contribute a minimum quantum of tax based on their book profits (for companies) or adjusted total income (for other persons). The provision is designed to plug revenue leakages arising from aggressive tax planning and to promote horizontal equity in taxation.

The inclusion of various classes of taxpayers (companies, co-operative societies, other persons) and the detailed mechanism for computation and adjustment reflects the legislature's intent to create a robust, anti-avoidance framework that is aligned with contemporary accounting standards and international best practices.

2.2 Policy Considerations and Historical Background

The policy rationale for MAT/AMT, as first enshrined in Section 115JA, was to counteract the proliferation of "zero tax companies" and ensure a minimum tax base. Over time, the regime has expanded to cover non-corporate taxpayers (through AMT), incorporated nuanced adjustments to reflect modern accounting standards (such as Ind AS), and provided targeted reliefs for specific sectors (e.g., International Financial Services Centres, IFSCs). Clause 206(1) embodies these policy developments, aiming for a balance between revenue protection and incentivization of priority sectors.

3. Detailed Analysis of Clause 206(1) of the Income Tax Bill, 2025

3.1 Structure and Scope

Clause 206(1) operates as a non-obstante provision, overriding all other provisions of the Act. It applies to all assessees listed in the prescribed Table, including companies (with special rates for IFSC units), co-operative societies, and other persons (excluding certain categories). The provision triggers when the tax payable on total income as computed under the Act is less than a specified percentage of book profit (for companies) or adjusted total income (for others).

3.2 Mechanism of Operation

• Deemed Total Income: Where the regular tax liability is less than the specified percentage of book profit/adjusted total income, the latter is deemed to be the total income for tax purposes.
• Prescribed Rates: The Table specifies the applicable rates:
  • 15% of book profit for domestic companies (other than IFSC units).
  • 9% of book profit for IFSC units (companies earning solely in convertible foreign exchange).
  • 18.5% of adjusted total income for non-corporate assessees (excluding co-ops and IFSC units).
  • 9% for non-corporate IFSC units.
  • 15% for co-operative societies.
• Computation of Book Profit and Adjusted Total Income:
  • Book Profit (for companies): Computed as per a specified formula (B = P + (I-R)), where P is profit per statement of profit and loss, I is the sum of items to be increased, and R is the sum of items to be reduced, as detailed in sub-section (2) of Clause 206.
  • Adjusted Total Income (for others): Total income before effect to this section, increased by specified deductions (e.g. under Chapter VIII-C, section 144, section 46, reduced by depreciation as per section 33).

3.3 Key Provisions and Interpretative Issues

3.3.1 Items to be Increased and Reduced (Book Profit Computation)

The provision meticulously enumerates items to be added back to, or deducted from, the net profit as per the statement of profit and loss. These include income-tax provisions, reserves, provisions for unascertained liabilities, losses of subsidiaries, dividends, certain expenditures, depreciation, deferred tax, diminution in asset value, and specified adjustments for special categories (e.g., Ind AS companies, companies under insolvency, etc.).

Similarly, reductions are provided for withdrawals from reserves (with anti-abuse conditions), income exempt under specified provisions, depreciation (excluding revaluation), certain losses, and other specified items.

This detailed approach seeks to ensure that the book profit reflects the real economic profit of the company, minimizing the scope for manipulation through accounting entries.

3.3.2 Special Provisions for Certain Assessees

Clause 206(1) and its subsequent sub-sections provide tailored adjustments for various classes of taxpayers, including:

• Members of associations of persons or bodies of individuals (AOP/BOI).
• Foreign companies (with special rules for income taxed at concessional rates).
• Companies involved in business trusts, demergers, or subject to insolvency proceedings.
• Companies following Ind AS, with transition adjustments spread over five years.

These provisions reflect an attempt to address the diverse tax positions and accounting practices of different taxpayers, thereby enhancing the equity and accuracy of the MAT/AMT regime.

3.3.3 Exemptions and Non-Applicability

Clause 206(6), (17), and (18) carve out significant exceptions. Notably, foreign companies without a permanent establishment, certain insurance companies, specified funds, and small taxpayers (with adjusted total income below INR 20 lakhs) are excluded. Further, the provision does not apply to successor LLPs in case of conversion, and to persons opting for certain alternative tax regimes.

3.3.4 MAT Credit and Carry Forward

A robust mechanism is provided for the grant, carry forward, and set-off of MAT/AMT credit, with a maximum carry-forward period of 15 years. No interest is payable on MAT credit, and adjustments are prescribed for foreign tax credits and subsequent changes in tax liability due to appellate orders.

3.3.5 Procedural and Compliance Requirements

Assessees subject to Clause 206 must obtain and furnish a report from an accountant certifying the computation of book profit or adjusted total income, thereby ensuring procedural rigor and minimizing disputes.

3.4 Practical Implications

• Wider Applicability: Unlike Section 115JA, which applied only to companies, Clause 206(1) extends MAT/AMT to co-operative societies and other non-corporate persons, subject to specified thresholds and exceptions.
• Targeted Incentives: Lower MAT/AMT rates for IFSC units and certain non-corporate assessees encourage the development of international financial services and align with India's policy of promoting global competitiveness.
• Alignment with Modern Accounting: The provision incorporates adjustments for Ind AS convergence, reflecting the transition to global accounting standards and reducing the scope for accounting arbitrage.
• Enhanced Compliance Burden: The detailed adjustments, reporting requirements, and need for professional certification increase compliance costs but are justified by the need for accuracy and anti-abuse.
• Relief for Distressed Entities: Special reliefs for companies under insolvency or sick industrial companies provide necessary breathing space to distressed businesses.

4. Comparative Analysis: Clause 206(1) vs. Section 115JA

4.1 Scope and Applicability

• Section 115JA: Applied exclusively to companies for a limited period (AY 1997-98 to AY 2000-01), with a flat MAT rate of 30% of book profit.
• Clause 206(1): Applies to a much wider spectrum of taxpayers (companies, co-ops, other persons), with differentiated rates and broader, more permanent application.

4.2 Computation of Book Profit

• Section 115JA: Book profit was defined as net profit per P&L account (as per Schedule VI to the Companies Act, 1956), increased by specified items (tax provisions, reserves, provisions for unascertained liabilities, etc.) and reduced by withdrawals from reserves, exempt income, certain losses, and profits from specified undertakings.
• Clause 206(1): Retains the core structure but significantly expands the list of adjustments, incorporates Ind AS-related items, and provides detailed computational rules for special cases (e.g., business trusts, IFSC units, insolvency cases).

4.3 Rates and Thresholds

• Section 115JA: Flat 30% of book profit for all companies.
• Clause 206(1): Graduated rates (15%, 9%, 18.5%) based on class of assessee and special status (e.g., IFSC), reflecting a more nuanced, incentive-driven approach.

4.4 Adjustments for Losses and Depreciation

• Section 115JA: Allowed reduction for loss brought forward or unabsorbed depreciation (whichever is less) as per books; certain exclusions applied.
• Clause 206(1): Retains this principle but introduces further exceptions for companies under insolvency or specified circumstances, and provides for detailed tracking of such adjustments.

4.5 Special Provisions and Carve-outs

• Section 115JA: Excluded profits from power generation, infrastructure, industrially backward areas, and sick industrial companies for specified periods.
• Clause 206(1): Expands carve-outs to include IFSC units, specified funds, certain foreign companies, insurance companies, small taxpayers, and those under alternative tax regimes.

4.6 MAT Credit Mechanism

• Section 115JA: Did not provide for MAT credit; this was introduced only with Section 115JAA (from AY 2001-02 onwards).
• Clause 206(1): Contains a detailed MAT/AMT credit regime, including carry forward, set-off, and adjustment for foreign tax credits and appellate orders, with a 15-year carry forward period.

4.7 Procedural Requirements

• Section 115JA: Required preparation of P&L account as per Companies Act, 1956, and calculation of depreciation as per the same basis as for AGM presentation.
• Clause 206(1): Requires professional certification of computation, and alignment with Companies Act, 2013 (or governing enactments for special companies), reflecting updated corporate law.

4.8 Alignment with Modern Accounting Standards

• Section 115JA: Based on Indian GAAP prevailing under Companies Act, 1956.
• Clause 206(1): Incorporates adjustments for Ind AS convergence, transition amounts, and other comprehensive income, reflecting the evolution of Indian accounting standards.

4.9 Anti-Avoidance and Anti-Abuse Measures

• Section 115JA: Provided basic anti-abuse rules for withdrawal from reserves/provisions.
• Clause 206(1): Incorporates more sophisticated anti-abuse measures, including detailed rules for reserves, provisions, transition adjustments, and special situations.

4.10 Relief for Distressed Entities

• Section 115JA: Provided relief for sick industrial companies for a limited period.
• Clause 206(1): Expands relief to companies under insolvency proceedings, those with suspended boards, and provides for special treatment of profits/losses during the rehabilitation period.

5. Practical Implications and Stakeholder Impact

5.1 For Companies

Clause 206(1) modernizes the MAT regime, aligning it with contemporary business realities and accounting standards. The provision ensures that companies, especially those availing of substantial deductions or operating in special economic zones, contribute a fair share of tax. The differentiated rates for IFSC units incentivize international financial activity, while the detailed computational rules reduce ambiguity and potential for disputes.

5.2 For Non-Corporate Assessees

The extension of AMT to non-corporate entities (co-operatives, others) brings parity and broadens the tax base, though small taxpayers are protected through income thresholds. Co-operative societies, which previously enjoyed more favorable tax treatment, are now subject to minimum tax, reflecting a shift towards a more uniform regime.

5.3 For Foreign Companies and Multinationals

The carve-outs for foreign companies without a PE, and for those earning only specified income taxed at concessional rates, provide clarity and avoid double taxation. The alignment with international tax treaties and the exclusion of certain IFSC activities enhance India's attractiveness as a global financial hub.

5.4 For Distressed and Special Entities

Companies under insolvency, sick industrial companies, and those undergoing restructuring are provided relief, reducing the tax burden during critical periods and facilitating business revival.

5.5 Compliance and Administrative Burden

While the provision enhances tax equity and revenue, it imposes significant compliance obligations, including detailed computations, professional certification, and ongoing tracking of MAT/AMT credit. However, these requirements are necessary to ensure the integrity of the regime and minimize litigation.

6. Comparative Insights and Unique Features

• Broader Applicability: Clause 206(1) applies to a wider range of taxpayers than Section 115JA, reflecting the evolution of the Indian tax base.
• Modern Accounting Integration: Incorporation of Ind AS adjustments and transition amounts demonstrates a forward-looking approach, making the regime compatible with global standards.
• Nuanced Incentivization: Special rates for IFSC units and carve-outs for specified funds reflect targeted policy interventions to promote priority sectors.
• Comprehensive Credit Mechanism: The MAT/AMT credit regime is more robust and taxpayer-friendly, though subject to anti-abuse safeguards.
• Enhanced Relief for Distressed Businesses: The inclusion of special rules for companies under insolvency or with suspended boards reflects a pragmatic approach to business cycles.

7. Conclusion

Clause 206(1) of the Income Tax Bill, 2025 represents a significant evolution of the MAT/AMT regime originally introduced by Section 115JA of the Income-tax Act, 1961. While retaining the core principle of ensuring a minimum tax contribution based on book profits or adjusted total income, the new provision expands the ambit, introduces nuanced rates and adjustments, and aligns the regime with modern accounting standards and policy objectives. The comparative analysis reveals a shift from a simple, company-centric MAT to a comprehensive, multi-tiered framework

 

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Full Text:

Clause 206 Special provision for minimum alternate tax and alternate minimum tax.

 

 

Dated: 6-5-2025