The Hindu Business Line : Suspend book profits tax

The imposition of book profits tax involves denial of deductions and relief to which the companies are entitled. It penalises the efficient companies.

T. C. A. Ramanujam

Chapter XII B was introduced in the Income-Tax Act by Finance Act 1987. It contains special provisions relating to certain companies which were considered to be earning high incomes without paying tax. These companies were euphemistically referred to as ‘zero tax’ companies.

The law provided that wherever the total income of the company for any year was less than 30 per cent of book profits, the total income chargeable to tax shall be deemed to be an amount equal to 30 per cent of such book profits.

Controversial Section

The term ‘book profits’ has been elaborately defined to include and exclude certain amounts in the computation of the net profit for purposes of the levy. Section 115J of the Income-Tax Act, 1961 became Section 115JA in 1996.

Section 115JAA was added w.e.f. April 1, 1997. Finally, Finance Act 2000 inserted Section 115JB levying 7.5 per cent tax on book profits of such companies. The tax rate was raised to 10 per cent w.e.f. April 1, 2007.

The Section gave rise to large-scale litigation. How are book profits to be computed?

What is the treatment to be given to depreciation and losses? What about the company law provisions?

Companies heaved a sigh of relief when the Supreme Court ruled in the Apollo Tyres case that the assessing officer (AO) must accept the authenticity of accounts certified by statutory auditors for being filed before the Registrar of Companies (RoC).

At the same time, the Section made no distinction between income-tax payable in India and that payable abroad. Interest was chargeable under Sections 234B and 234C for short payment of advance tax. The retrospective amendment made in this regard in Section 115JB was held constitutionally valid.

Accounting Standards required that prior period items and extraordinary items should be shown separately as a matter of disclosure for identification of current profits.

The Delhi High Court ruled that merely because they are indicated separately, it does not mean that such items need not be taken into account in computing book profits liable for Minimum Alternate Tax (307 ITR 150). The law bristles with uncertainties and difficulties for the tax-paying companies.

The Rationale

The idea behind MAT is to tax the company which showed a book profit, but does not show taxable income. The question was posed by critics: Can a category of assessees be singled out for tax on book profits when the income computed under the Act is either a negative figure of loss or an amount less than the book profit?

Does it not give a go-by to the entire scheme of computation?

Palkhivala had pointed out that the section is economically unsound and morally repugnant, because companies hit by the section are in reality the most dynamic enterprises in our corporate sector.

They undertake plans of development and expansion which result in capital formation, productive investment, increased employment, and larger revenues for the state by way of customs, excise, sales tax, etc.

It penalises ‘zero-tax’ companies, unfairly ignoring the total fiscal burden discharged by the companies and adverting only to income-tax.

The Section discriminates against limited companies because in identical circumstances, other entities such as partnerships and sole proprietorships are left untouched. The corporate form of business organisation is specially chosen for adverse discrimination.

The imposition of book profits tax involves denial of deductions and relief to which the companies are entitled. It penalises the efficient companies.

Although the fiscal framers thought that the Section will hit tax planning, the way book profits came to be defined gave an added dimension to tax planning to avoid even the zero tax.

Stimulus package

Late in 2008, advance tax collections have been falling and companies have started reporting lower profits. The Government has recognised the difficulties facing the corporate sector and announced stimulus packages to reverse the economic slowdown.

Monetary measures such as cut in the cash reserve ratio (CRR) and in the repo rate were followed by withdrawal of countervailing duty exemptions on import of certain steel products and cements.

Exporters have been given higher rate for tax refunds. The DEPB schemes will be extended up to 2009. Duty drawbacks at enhanced rates have been announced for certain sectors. These measures are meant to revive a sagging economy and add to the cash flow in the system. How come the stimulus package has no mention of direct tax relief in any sector?

Several avenues are open to the Government to help the corporate sector with tax reliefs. The American corporate world is eagerly awaiting large tax cuts to be implemented by the new US President.

The least that the Union Finance Ministry can do to provide relief to the corporate sector is to abolish the book profits tax. In the alternative, its operation can be suspended for a couple of years to boost the market sentiment and confidence.

The stimulus package will be more complete with this measure.

(The author is a former Chief Commissioner of Income-Tax. blfeedback@thehindu.co.in)