Section 115JB of the Income-tax Act, 1961 (the Act) provides that in case of a company, if the tax payable on the total income as computed under the Act in respect of any previous year relevant to the assessment year commencing on or after 1.4.2012, is less than eighteen and one-half per cent of its book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee for the relevant previous hear shall be eighteen and one-half per cent of its book profit. This is called Minimum Alternate Tax (MAT).

The spirit behind levy of MAT is that every person participating in the economy must contribute to the exchequer. As a result of various exemptions, deductions and other tax incentives in the corporate sector, the revenue forgone has been climbing up significantly. MAT is aimed at recouping a part of the loss in revenue collection on account of exemptions, deductions and other tax incentives in the corporate sector. MAT was introduced to address inequity in taxation of corporate tax payers and to promote inter-se equity among them.

There were representations received from various stakeholders on the issue of levy of MAT. In the wake of representations, the Government constituted Justice Shah Committee to look into the issue which submitted its report to the Government on 25.8.2015. Taking into account all relevant facts, it was decided by the Government that MAT shall not be applicable to a foreign company, if the foreign company does not have a permanent establishment under relevant Double Taxation Avoidance Agreement (DTAA) or a place of business in India. Accordingly, Finance Bill 2016 proposes to amend the law with retrospective effect from 1.4.2001 to give effect to the above decisions.

This was stated by Shri Jayant Sinha, Minister of State in the Ministry of Finance in written reply to a question in Lok Sabha.

Minimum Alternate Tax exemption for foreign companies lacking permanent establishment removes MAT liability under proposed retrospective amendment. Section 115JB imposes a Minimum Alternate Tax (MAT) based on book profit to address revenue loss from corporate exemptions and ensure tax equity. The Government decided that MAT will not apply to a foreign company that does not have a permanent establishment under the relevant Double Taxation Avoidance Agreement or a place of business in India, and proposed retrospective amendment to implement that exclusion.