With the Union Budget 2024 set to be presented tomorrow, there is anticipation among corporations for the rationalisation of certain tax provisions to provide genuine relief. This article focuses on the need to further rationalise application of Section 115JB (2D) of the Income-tax Act, 1961.
Why was MAT introduced?
Some companies, despite having substantial profits, were paying little to no tax by using different provisions to reduce their taxable income. To address this, the government introduced MAT to ensure that every profitable company pays at least a minimum tax.
Background
When a company enters into an Advance Pricing Agreement (APA) with the CBDT, it must re-compute its income for the years covered by the APA. Any additional income arising from the APA is recorded as income in the year the APA is concluded, affecting the book profit under section 115JB and potentially requiring the company to pay tax under MAT provisions.
Current Provisions
Section 115JB (2D) of the Income Tax Act allows companies to apply to the Assessing Officer (AO) to re-compute book profits for past years when income from an APA is included. The Finance Bill, 2021, included this provision, effective from AY 2021-22, allowing reassessment within four years from the application date.
However, the enactment added provisos that restrict this benefit if MAT credit has been utilised in subsequent years and deny interest on refunds arising from this provision.
Issues and Recommendations:
MAT Credit Utilisation Restriction
The current restriction prevents companies from applying for relief if they have utilised MAT credit in subsequent years.
Recommendation: Amend the proviso to allow applications but reduce refunds by the amount of MAT credit already used.
Interest Re-calibration
Interest under Sections 234B and 234C of the Income Tax Act should be recalibrated based on the reduced tax liability after applying section 115JB (2D).
At present, if a company utilises MAT credit of ₹1.07 crore in AY 2024-25 out of ₹3.07 crore available before applying for relief, it cannot apply for relief and loses interest paid under sections 234B and 234C for AY 2023-24.
Recommended Change
With the recommended amendment, the company can apply for relief, and the refund will be reduced by the MAT credit used. The company would recover the balance and the interest paid.
Impact on Past Years
For AYs before 2021-22, companies would have utilised MAT credit without anticipating this relief. The recommended change would balance the position between companies that used MAT credit and those that didn’t.
The Union Budget 2024-25 must address the complexities surrounding MAT relief by rationalising Section 115JB (2D) of the Income Tax Act to provide fair and effective relief for companies affected by APAs. By allowing applications for relief even when MAT credit has been utilised, and recalibrating interest payments under Sections 234B and 234C, the government can ensure equitable treatment of all companies.
These changes will resolve existing imbalances and offer genuine relief to companies, paving the way for a more just tax system.
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