The Hindu Business Line : Still floored by MAT

The Finance Minister seems to have no love lost for the corporate sector if his constant sniping at it is any indicator. Last year, it was the fringe benefit tax — remember corporates provide bulk of the employment in the organised sector — which was a wrong solution to a genuine problem — personal expenses not only passing off as business expenditure but also in addition the beneficiaries paying no tax at all on the value of benefit enjoyed by them at company's tax-deductible expense.

This time round, the upping of the minimum alternate tax (MAT) rate from 7.5 per cent to 10 per cent of book profits has taken everyone by surprise, especially when nobody was complaining of poor collections from the corporate sector.

In fact, with the lowering of depreciation rates for tax purposes closer to the ones applied for computing book profits, the bottom was knocked out of the case for the invidious MAT. So much so, a few die-hard optimists were secretly hoping for its abolition.

Ironically, far from abolishing it, its sinews have been invigorated and its vice-like grip strengthened much to the consternation of such hopefuls, in particular, and the corporate sector, in general. Of course, a section of the corporate sector was guilty of inviting trouble, by resorting to the hare-brained stratagem of claiming depreciation in the books on assets whose values were ratcheted up in a revaluation exercise that did not fool anybody for long.

Besides being a bad tax planning exercise, it also was against the well-accepted accounting tenet that requires depreciation on the heightened portion of the asset, as it were, thanks to revaluation not to be charged to profit and loss account but to the revaluation reserve direct. Nemesis caught up with them when the Finance Minister not only called their bluff but went beyond with a vengeance. For, there was no earthly reason why he should increase the MAT rate to 10 per cent, especially in a buoyant economy when tax collections from the corporate sector were on the upswing.

On their part, the corporates are not going to be mollified by the increase in the carry forward period of MAT credit from five to seven years given the fact that what is allowed as set off against the actual tax liability computed in accordance with the normal provisions of the Income-tax Act, 1961 is a pittance — the difference between such tax liability and the notional MAT.

To wit, suppose for a given assessment year the actual tax liability works out to Rs 100 crore whereas MAT works out to Rs 200 crore, then Rs 100 crore being the difference can be carried forward, which is fine. But in the next year, should the actual tax liability be Rs 200 crore and the notional MAT Rs 150 crore, the company will have to cough up Rs 150 crore in cash with the set off being restricted to only Rs 50 crore being the difference between actual tax and notional MAT.

In other words, come what may, the corporates will have to fork out in cash at least the amount equal to MAT no matter whether in a particular year they come under its purview or not. In all fairness, in the example on hand, the company concerned should have been allowed the set off of the entire MAT credit it is nursing gingerly.

In short, it ought to be called upon to pay in cash only Rs 100 crore. This head-I-win-tails-you-lose attitude may result in companies having the mortification of their brought forward MAT credit going abegging. Therefore, instead of prolonging their agony, so to speak, from five to seven years, the entire MAT credit at one's disposal should have been allowed as set off at the earliest opportunity.

The moot question however is why MAT at all. When it was ushered in, the explanation trotted out was it was unfair for dividend-paying companies to cock a snook at the exchequer. Now that payment of dividend is in fact preceded by payment of distribution tax, the Government's ire on this count should have been doused. That its anger, far from being extinguished, has actually intensified, is perplexing to say the least.

(The author is a Delhi-based chartered accountant.)