MAT IN New Direct Tax Code
AUGUST 8, 2010
By Bhawna Gulati
MINIMUM Alternate Tax is the tax paid by the companies even when they have zero or negative income as per the income tax provisions. The companies pay tax on the income calculated as per the provisions of the Income Tax Act. Many a times the incentives and exemptions provided for in the Income Tax Act are used in such a way that the income of the companies come out to be negative or insignificant. Therefore, the presumptive income concept is used in many jurisdictions though the economic basis differs as we move from one country to another. It is pertinent to note here that for the purposes of dividends the company uses book profit which is calculated as per the Companies Act. Because of this difference, there were many companies which had book profits as per their profit and loss account but were not paying any tax because income computed in accordance with the Income Tax Act provisions was either nil or negative or insignificant. Consequently, although the companies were showing book profits and declaring dividends to the shareholders, they were not paying any income tax. Such companies are often termed as Zero Tax Companies. Therefore, to tackle such companies the concept of Minimum alternate Tax was introduced in the Direct Tax system to ensure that the companies taking advantage of the incentives and exemptions under the Income Tax Act pay a fixed percentage of book profits as minimum alternate tax. This is to ensure that companies having large profits and declaring substantial dividends to shareholders contribute towards the government revenue.
This MAT was calculated as a percentage of book profit. The percentage was changed and revised from time to time to match the changing circumstances.
As per the present provisions in the Income Tax Act the minimum alternate tax is payable at the rate of 15% of the book profits of the company. Sec 115 JB provides that such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of income-tax at the rate of 15%. For calculating the book profits the assessee is required to prepare its profit and loss account in accordance with the provisions of part II and III of Schedule of Companies Act, 1956.
Also the MAT credit is available. Tax paid under section 115JB for A.Y. 2006-07 and any subsequent year would be allowed as a credit from the normal tax payable for any subsequent year in accordance with the provisions contained in section 115JAA for 7 assessment years (upto assessment year 2009-10) and for 10 assessment years from assessment year 2010-11.
Proposal in the Direct Tax Code
The Direct Tax Code (DTC) provided for the computation of MAT on the basis of "value of gross assets" of the company proposing to replace the age old practice of basing the MAT on book profits. It has been proposed in the DTC that the "value of gross assets" will be the aggregate of the value of gross block of fixed assets of the company, the value of capital works in progress of the company, the book value of all other assets of the company, as on the last day of the relevant financial year, as reduced by the accumulated depreciation on the value of the gross block of the fixed assets and the debit balance of the profit and loss account if included in the book value of other assets. According to the DTC, the MAT payable by the banking companies will be calculated at 0.25% of its gross assets and for other companies the rate is 2% of gross assets. Moreover, there was no provision of deducting liabilities while calculating the value of gross assets and no MAT credit was allowable in the subsequent years. The rationale for the basing the Mat on the value of gross assets seems to be that the investors can expect before hand to earn a specified average rate of return on their assets; hence it provides an incentive for efficiency. The possible rationale can also be attributed to widen the tax base by levying tax on companies not paying tax on account of various incentives.
Though the economic rationale argument of enhancing the efficiency sounds good as it will force the loss making companies to shut down their businesses, it will adversely hit companies which have long gestation period and which start making profits only after few initial years of losses inherent to their very nature. Another category of companies which will be badly hit are capital intensive companies which have high fixed capital asset base. Similarly for companies which are in the process of growth and expansion will have high investment in their assets which will lead to a much higher MAT than their actual income tax liability.
Implementing MAT calculation on the basis of gross value of assets without giving any exemption for a specified number of years to such capital intensive companies is also not in sync with the international best practices. In Argentina, there is allowance for the gestation period. In Mexico too, tax is not levied during the year in which the enterprise was started and the following three years of its operations.
It is notable here that the asset based MAT calculation does not take care of the cascading effect it might produce in the case company having subsidiary companies and in the case of multiple tiers of subsidiaries. Suppose a subsidiary company pays tax on the basis of its gross asset. Now the gross assets of the subsidiary, up to the extent held by holding company, will show as an investment in the books of holding thereby reflecting the same assets and leading to a double taxation on those assets if the holding company also pays MAT based on the value of its gross assets.
Another major anomaly is the definition of the value of gross assets which also include non revenue generating items like capital work in progress, thereby distorting the tax base.
Revised Discussion Paper to Direct Tax Code
Considering the above stated issues and criticism received from the corporate stakeholders, it is proposed in the discussion paper to reinstate Book Profit as the basis of calculating MAT and not the Gross asset value which was proposed in the DTC. This has come as a big relief to the corporate houses engaged in businesses having long gestation periods and also those businesses that require high capital investment.
However what exactly will be the final formulation and way of computation of the MAT provisions in the bill still remains to be seen.