Rationalisation of MAT Provision

Suyash Tripathi | Last updated: 07 May 2021

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Following the abolition of the Dividend Distribution Tax (DDT) from April 1, 2020, dividends received by foreign companies from Indian investments are now taxable in the shareholder's hands. Amendments proposed in the Finance Bill, 2021, aim to adjust the calculation of Minimum Alternate Tax (MAT) for foreign companies. Specifically, dividend income and related expenses will be added back or reduced from net profit when computing MAT, particularly if the dividend income is taxed at a lower rate due to a Double Taxation Avoidance Agreement (DTAA).

It is pertinent to note that the Finance Act, 2020 has abolished the dividend distribution tax (DDT) with effect from Assessment Year 2021-22. Therefore, the dividend declared, distributed or paid on or after 01-04-2020 is now taxable in the hands of the shareholder. Thus, if a foreign company receives a dividend in respect of its investment in India, it shall be liable to pay MAT on such dividend income even if such income is chargeable to tax at a rate lower than the rate of MAT. Thus, it was recommended that Section 115JB should be amended to provide that dividend income and expenses claimed in respect thereof to be added back or reduced from the net profit while computing MAT in case of foreign company.

The Finance Bill, 2021 has proposed to amend section 115JB to provide that dividend income and expenses claimed in respect thereof to be reduced or added back from the net profit if such income is taxed at lower than MAT rate due to DTAA. It should be noted that the dividend income shall be taxable in the hands of a foreign company in accordance with the provisions of the Act or relevant DTAA, whichever is more beneficial

MAT Provision Rationalisation for Foreign Companies

In cases where past year income is included in books of account during the previous year on account of an APA or a secondary adjustment, the Assessing Officer shall, on an application made to him by the Assessee, recompute the book profit of the past year(s) and tax payable, if any, during the previous year, in the prescribed manner.

Similar treatment to dividend as already there for capital gains on transfer of securities, interest, royalty and Fee for Technical Services (FTS) in calculating book profit for the purposes of section 115JB of the Act, so that both specified dividend income and the expense claimed in respect thereof are reduced and added back, while computing book profit in case of foreign companies where such income is taxed at lower than MAT rate due to DTAA.

This amendment will take effect from 1st April, 2021 and will accordingly apply to the assessment year 2021-22 and subsequent assessment years.

FAQ :

The Finance Act, 2020 abolished the dividend distribution tax (DDT) effective from Assessment Year 2021-22. Dividends declared, distributed, or paid on or after 01-04-2020 are now taxable in the hands of the shareholder.

Yes, a foreign company receiving dividend income from its investment in India is liable to pay MAT on such dividend income, even if it's taxed at a rate lower than the MAT rate.

The Finance Bill, 2021 has proposed amending Section 115JB to allow dividend income and related expenses to be reduced or added back from the net profit when computing MAT for foreign companies, especially if the income is taxed at a lower rate due to a DTAA.

Dividend income is taxable in the hands of a foreign company according to the provisions of the Act or the relevant DTAA, whichever is more beneficial.

If past year income is included in the books of account during the previous year due to an APA or secondary adjustment, the Assessing Officer can recompute the book profit of the past year(s) and the tax payable upon application by the Assessee.

These amendments will take effect from 1st April 2021, applying to the assessment year 2021-22 and subsequent assessment years.