Tax sops on the MAT?

Over the past decade, corporate tax rates have been falling while the Minimum Alternate Tax (MAT) rate has rapidly increased from 7.5 per cent in 2006 to 18.5 per cent in 2012. This is diminishing the leeway for corporates claiming tax incentives. Apart from rising MAT rate, the definition of “book profit” on which MAT is payable has expanded to include credit items that are otherwise not considered while computing net profit under the Companies Act, 1956. Similarly, expenditure that is deductible while computing net profit is not allowable in computing MAT book profit. Added to this, the scope of MAT is being expanded to cover more types of taxpayers. All these changes limit the benefits of claiming tax incentives and negate their purpose.

Why MAT

MAT was introduced to curb the practice of companies earning substantial profits and declaring large dividends but paying nil or negligible taxes.

Currently, MAT is levied at 18.5 per cent of the adjusted book profit for companies that pay income tax less than 18.5 per cent of the adjusted book profit under normal provisions.

Companies were under the scope of MAT since financial year 1987-88, with limited liability partnerships (LLPs) roped under Alternate Minimum Tax (AMT) from FY 2011-12. Over the years, the concept of MAT has evolved and it is now extended to non-corporate taxpayers and others.

Beyond corporates

After amendments through the Finance Act, 2012, AMT at 18.5 per cent will be levied on all non-corporate taxpayers if tax under normal provisions is less than 18.5 per cent of adjusted total income (that is, total income as increased by profit-linked deductions, including deductions claimed by SEZ units). To provide some relief, AMT shall not apply to an individual, Hindu undivided family and so on, if the adjusted total income is Rs 20 lakh or lower. Credit for AMT paid will be available for 10 years, on the same lines as MAT.

In an attempt to widen the tax base, especially in cases where profit-linked deductions are claimed, an additional liability is cast on non-corporate taxpayers, coupled with compliance/ administrative hassles.

The extension of MAT beyond the corporate arena will especially impact firms and LLPs in the infrastructure sector and those owning SEZ units. It appears counterproductive to expose all taxpayers to an alternate tax treatment as that will neutralise the immediate benefit of tax incentives.

special companies

The base for computation of “book profit” on which MAT is payable is the net profit reflected in the profit-and-loss account prepared in accordance with the Companies Act.

Certain classes of companies, such as banking, insurance and electricity companies, are not required to maintain accounts in accordance with the Companies Act. Such companies maintained that MAT was not applicable to them.

Finance Act, 2012, specifically makes MAT applicable to such classes of companies. With effect from FY 2012-13, they have to prepare profit-and-loss account in accordance with specific governing laws.

By implication, MAT on “book profit” for such companies shall be computed based on the net profit declared in their profit-and-loss account in accordance with respective governing statutes. It has also been clarified that for previous years, such companies can prepare their profit-and-loss account as per the Companies Act or the applicable governing laws.

An exception to this rule is the life insurance business, which will continue to be governed by the beneficial tax rate of 12.5 per cent.

Over the past years, the scope of MAT has expanded to a great extent. To begin with, companies claiming tax holidays in relation to infrastructure and industrially backward areas were brought within its purview. Thereafter export-oriented units (including companies in the IT/ ITES sector) were required to pay MAT.

More recently, SEZ units were brought within the MAT net. By the Finance Act, 2012, alternate tax in the form of AMT has been extended from LLPs to non-corporate taxpayers as well.

The MAT rate has increased 2.5 times in six years. On the other hand, the tax incentives available to taxpayers are shrinking rapidly, and there is a move towards investment-linked deductions (as against profit-linked deductions).

Keeping in mind these factors, and in the light of the fact that MAT/ AMT is essentially collection of tax in advance, as credit for MAT/ AMT is to be allowed in the future, it is imperative that the Government weighs the benefits and costs before deciding whether to continue with alternate taxation or not.

Namrata Arora is Manager and Sakshi Rehani is Assistant Manager, Deloitte Haskins & Sells

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