Harmonizing Minimum Tax Computation under India's Income Tax Laws : Clause 206(2)-(5) of the Income-tax Bill, 2025 Vs. Section 115JB and Section 115JC of the Income-tax Act, 1961

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

Income Tax Bill, 2025

Introduction

The provisions relating to Minimum Alternate Tax (MAT) and Alternate Minimum Tax (AMT) have long been a cornerstone of India's income tax regime, designed to ensure that companies and certain non-corporate entities pay a minimum level of tax, regardless of deductions and exemptions otherwise available under the Act. Clause 206 of the Income Tax Bill, 2025, seeks to consolidate, modernize, and expand upon the MAT and AMT framework. Sub-clauses (2) to (5) of Clause 206 are particularly significant, as they detail the computation methodology for book profits, prescribe the preparation of financial statements, and mandate consistency in accounting policies.

This commentary provides an in-depth analysis of Clause 206(2)-(5), contrasting these provisions with the existing Section 115JB (MAT for companies) and Section 115JC (AMT for non-corporates) of the Income Tax Act, 1961, as well as the operational relevance of Rule 10RB of the Income-tax Rules, 1962. The analysis is structured to elucidate legislative intent, technical nuances, practical implications, and comparative perspectives.

Objective and Purpose

The primary objective of Clause 206 is to ensure that taxpayers, especially those availing substantial deductions or incentives, contribute a minimum quantum of tax to the exchequer. The legislative intent is to prevent the erosion of the tax base through aggressive tax planning, aligning with global best practices on minimum taxation. Sub-clauses (2) to (5) focus on the mechanisms for determining the base (book profit or adjusted total income), standardizing accounting practices, and ensuring the integrity and comparability of financial reporting for tax purposes.

Historically, MAT was introduced to address the issue of "zero tax companies"-profitable companies that paid little or no tax due to various incentives. Over time, the scope was broadened to cover other entities through AMT. The 2025 Bill's Clause 206 is a continuation and rationalization of this approach, aiming for clarity, consistency, and adaptability to evolving accounting standards (notably Ind AS).

Detailed Analysis of Clause 206(2) to (5) of the Income Tax Bill, 2025

1. Clause 206(2): Computation of Book Profit

Textual Overview: Clause 206(2) sets forth the formula for computing book profit (B) as:
B = P + (I - R)
where P is the profit as per the statement of profit and loss, I is the sum of specified increases, and R is the sum of specified reductions.

Increases (I): The clause lists items to be added back to the net profit, such as:

• Income-tax paid or payable (including interest, surcharge, and cesses)
• Amounts carried to reserves
• Provisions for unascertained liabilities or losses of subsidiaries
• Debited dividends, certain expenditures, depreciation, deferred tax, diminution in asset values, and specific adjustments for certain assessees

Reductions (R): Items to be reduced include:

• Withdrawals from reserves (subject to conditions)
• Incomes exempt under specified sections if credited
• Depreciation (other than on revaluation), withdrawals from revaluation reserves, deferred tax credits, specified brought-forward losses/unabsorbed depreciation, and other specific items

 

Comparison with Section 115JB: Section 115JB employs a similar mechanism for book profit computation, with a nearly identical list of increases and reductions. However, Clause 206(2) introduces greater detail and specificity, particularly in the context of:

• Explicit referencing of the Companies Act, 2013 and Ind AS requirements
• Clarity on items such as deferred tax, revaluation reserves, and notional gains/losses
• Specific tables for assessees with unique situations (e.g., companies under insolvency, foreign companies)

The formulaic approach (B = P + (I - R)) enhances transparency and computational clarity compared to the narrative style of Section 115JB.

Comparison with Section 115JC: Section 115JC, applicable to non-corporate entities, operates on the concept of "adjusted total income" rather than book profit, but the logic of adding back deductions and certain adjustments is analogous. Clause 206(2) harmonizes the computational principles for both corporate and non-corporate assessees, promoting parity and reducing interpretational disputes.

Rule 10RB Relevance: Rule 10RB prescribes relief methodology for recomputation of MAT liability when past incomes are included in current book profits due to transfer pricing adjustments. While Rule 10RB is not directly referenced in Clause 206(2), the clarity in computation under Clause 206(2) facilitates easier application of such relief mechanisms, as the components of book profit are more precisely defined.

Ambiguities and Issues: Despite the detailed prescription, potential ambiguities remain regarding the classification of certain items (e.g., what constitutes "ascertained" vs "unascertained" liabilities, or "provisions" under Ind AS). The inclusion/exclusion of certain reserves and the treatment of notional items may require further clarification through rules or CBDT circulars.

2. Clause 206(3): Preparation of Statement of Profit and Loss

Textual Overview: This sub-clause mandates that every company must prepare its statement of profit and loss:

• For insurance, banking, electricity, or other specially governed companies: as per their respective governing enactments
• For all other companies: as per Schedule III to the Companies Act, 2013

 

Comparison with Section 115JB: Section 115JB(2) similarly requires preparation of accounts as per Schedule III of the Companies Act, 2013 (or the applicable law for special companies). The Bill's language is more explicit in its cross-referencing and in accommodating companies with non-standard financial years, ensuring alignment with the "tax year" concept.

Practical Implications: This provision ensures uniformity in the base financial statements from which book profit is computed, reducing the risk of manipulation or inconsistency. For companies transitioning to Ind AS or with non-standard financial years, the provision ensures that the accounting basis for tax is consistent with that for shareholders and regulators.

Potential Issues: The cross-jurisdictional application (e.g., for foreign companies or those with dual reporting obligations) may still pose challenges, particularly where local laws diverge from Indian requirements.

3. Clause 206(4): Further Adjustments to Book Profit

Textual Overview: Sub-clause (4) prescribes additional adjustments to book profit for specified classes of assessees, via a detailed table. These include:

• Members of AOPs/BOIs: adjustments for income/expenditure relating to tax-exempt shares
• Foreign companies: adjustments for certain capital gains, interest, dividends, royalty, and fees for technical services taxed at concessional rates
• Companies transferring assets to business trusts: adjustments for notional gains/losses on such transfers
• Companies under insolvency or with suspended boards: special treatment of brought forward losses and depreciation
• Companies following Ind AS: comprehensive adjustments for other comprehensive income, transition amounts, and specific Ind AS-related items

 

Comparison with Section 115JB: Section 115JB, over time, has incorporated similar carve-outs and adjustments for special situations (e.g., for foreign companies, business trust transactions, Ind AS transition, and insolvency). Clause 206(4) consolidates these into a single, easily referenceable table, enhancing accessibility and reducing the need to parse multiple explanations and provisos.

Ind AS Transition: Both Clause 206(4) and Section 115JB(2A)-(2C) contain elaborate provisions for companies transitioning to Ind AS, recognizing the significant impact of fair value accounting and other comprehensive income on book profits. The Bill follows the same policy of spreading "transition amounts" over five years and adjusting for subsequent disposal of assets or investments.

Rule 10RB Relevance: The precise adjustments under Clause 206(4), especially for past income included in book profits, are essential for the correct application of Rule 10RB, which calculates relief for MAT paid on such amounts.

Ambiguities and Issues: The complexity of these adjustments, especially for Ind AS adopters, may increase compliance burdens and require detailed guidance. The interplay between accounting standards and tax law continues to be a source of interpretational risk.

4. Clause 206(5): Consistency in Accounting Policies

Textual Overview: Clause 206(5) mandates that, when preparing annual accounts for MAT purposes, a company must apply the same accounting policies, standards, and depreciation methods/rates as used in the accounts laid before its AGM under the Companies Act, 2013. Where the company's financial year differs from the tax year, the accounting basis must correspond to that used for the relevant period.

Comparison with Section 115JB: Section 115JB(2) contains an almost identical requirement, ensuring that companies cannot use different accounting treatments for tax and statutory reporting. The Bill's provision is more detailed in accommodating companies with non-standard financial years.

Practical Implications: This requirement is crucial for maintaining the integrity of the tax base, preventing "book profit engineering" through selective accounting policy changes for tax purposes. It also aligns the interests of shareholders, regulators, and tax authorities.

Potential Issues: For multinational groups or companies undergoing mergers, demergers, or restructurings, the alignment of accounting policies across different reporting regimes may require additional reconciliations and disclosures.

Practical Implications for Stakeholders

For Companies: The detailed computational framework and alignment with Ind AS and Companies Act requirements enhance certainty but also increase compliance complexity, especially for companies with complex group structures, cross-border operations, or those undergoing insolvency or restructuring.

For Non-corporate Entities: The harmonization with AMT principles (Section 115JC) ensures that LLPs, partnerships, and other entities are brought into the minimum tax net, subject to similar computational rigor.

For Tax Authorities: The clarity and specificity of the provisions should facilitate more consistent assessments and reduce litigation, provided adequate guidance is issued for complex scenarios.

For Advisors and Auditors: The expanded reporting and certification requirements demand greater diligence in reviewing financial statements, adjustments, and disclosures.

Comparative Analysis with Existing Law

1. Scope and Applicability

• Section 115JB: Applies primarily to companies, with specific carve-outs (e.g., IFSC units, companies exercising certain options, SEZ units, foreign companies without PE, etc.).
• Clause 206: Expands applicability to non-corporate entities for AMT, with a clear table specifying rates and categories. This is a significant expansion, harmonizing MAT/AMT under a single provision.

2. Computation of Book Profit For corporate & Non- corporate

• Section 115JB: Uses a formulaic approach with detailed explanations for add-backs and deductions, but spread across several subsections and explanations, which can be cumbersome.
• Section 115JC: Clause 206 extends the MAT logic to non-corporates via AMT, with similar computational adjustments for adjusted total income. The Bill's approach is more integrated, reducing the artificial distinction between corporate and non-corporate minimum taxation.
• Clause 206(2)-(5): Systematizes this into a single formula (B = P + (I-R)) and a comprehensive table, improving clarity and reducing interpretational disputes.

3. Special Adjustments for Specific Entities

• Section 115JB: Contains special provisions for foreign companies, companies under insolvency, sick companies, and Ind AS adopters, but these are scattered and sometimes require cross-referencing.
• Clause 206(4): Consolidates these into a single table, with detailed notes, making the law more user-friendly.

4. Ind AS Transition

• Section 115JB (2A)-(2C): Introduces the concept of transition amounts, phased adjustment, and special rules for Ind AS adopters.
• Clause 206(4), (19)(f): Retains these features, with updated references and improved drafting, reflecting practical experience since Ind AS adoption.

5. Consistency in Accounting Policies

• Section 115JB(2) (Proviso): Requires consistency in accounting policies, standards, and depreciation methods for MAT purposes and statutory reporting.
• Clause 206(5): Reiterates and expands on this requirement, ensuring that differences in financial year or accounting methods do not affect MAT computation.

6. Relief Mechanisms: Advance Pricing Agreements and Secondary Adjustments

• Section 115JB(2D): Provides relief where book profits increase due to the inclusion of past income on account of Advance Pricing Agreements (APAs) or secondary adjustments. The Assessing Officer may recompute book profits of past years, with prescribed procedures and time limits.
• Clause 206(8)-(9): Mirrors this relief mechanism, allowing recomputation and explicitly denying interest on refunds arising from such recomputation.
• Rule 10RB: Lays down the computational formula for relief, specifying the method for recalculating MAT liability and reducing MAT credit, as well as procedural requirements (Form 3CEEA, verification, etc.).
• Clause 206: Prescribes that the manner of recomputation will be as prescribed-likely to be detailed in subordinate rules akin to Rule 10RB.

Unique Features and Potential Conflicts

• The Bill's consolidation of MAT and AMT in a single clause, with parallel computational logic, is a significant step towards simplification.
• However, the increased complexity for Ind AS adopters and companies with special circumstances may pose compliance challenges.
• The interaction with international tax treaties (especially for foreign companies) is clarified, but cross-border groups may still face practical hurdles.

Conclusion

Clause 206(2)-(5) of the Income Tax Bill, 2025, marks a significant evolution of the MAT and AMT framework in India. By providing detailed, tabular, and formulaic guidance for the computation of book profit and adjusted total income, the Bill enhances transparency and consistency, while aligning tax law with contemporary accounting standards and corporate law. The comparative analysis with Sections 115JB and 115JC reveals a strong continuity of policy, with meaningful improvements in clarity and scope. Rule 10RB's operational relevance is preserved and even enhanced by the Bill's precision.

As India's tax and accounting landscape continues to evolve, further administrative guidance and judicial interpretation may be required to address residual ambiguities and ensure effective implementation, especially in complex or novel scenarios.

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Full Text:

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

 

Dated: 6-5-2025