In India, the computation of book profit for income tax purposes is primarily relevant for companies. Book profit is calculated under Section 115JB of the Income Tax Act, 1961. The provision is applicable when the regular income tax payable by a company is less than a certain percentage of its book profit.
Here’s a simplified explanation of how book profit is computed under Section 115JB:
- Net Profit as per the Profit and Loss Account:
- Start with the net profit as per the profit and loss account prepared in accordance with the provisions of the Companies Act.
- Adjustments to Net Profit:
- Make adjustments to the net profit by adding or subtracting certain items. Some common adjustments include:
- Add back expenses disallowed under the Income Tax Act.
- Add back depreciation charged as per books and claim depreciation as per income tax rules.
- Adjustments related to provisions, reserves, and other items.
- Taxable Income as per Income Tax Act:
- Calculate the taxable income as per the provisions of the Income Tax Act, taking into account various deductions and exemptions.
- Book Profit:
- Compare the taxable income calculated above with the net profit adjusted for tax purposes. The higher of the two is considered as the book profit.
- Minimum Alternate Tax (MAT) Rate:
- Apply the MAT rate to the book profit. As of my knowledge cutoff in January 2022, the MAT rate is 18.5% of book profit plus applicable surcharge and cess.
- Tax Payable:
- Compute the tax payable on the book profit as per the MAT rate. If the tax payable is higher than the regular income tax payable on the taxable income, the company is required to pay tax on the higher amount.
It’s important to note that the tax laws are subject to change, and it’s advisable to refer to the latest amendments and notifications for accurate and up-to-date information. Additionally, companies are recommended to consult with tax professionals or experts to ensure compliance with the relevant provisions of the Income Tax Act.