Minimum Alternate Tax: A liability for companies

Taxation on income is a vital source of revenue for our Government.

Although Companies have to follow a mind-bogglingly complex procedure, the list of exemptions and deductions is long. As a result, a lot of Companies used these deductions and exemptions and escaped tax liability.

While they enjoyed book profits as per their profit and loss accounts (and sometimes even distributed dividend), tax liability as per the Income Tax Act was either nil or negative or insignificant.

To counter this “problem” the government came up with the concept of Minimum Alternate Tax (MAT) in the financial year 1997-1998.

What is Minimum Alternate Tax?

As per section 115 JA of the Income Tax Act, if a company's taxable income is less than a certain percentage of the booked profits, then by default, that much of the book profits will be considered as taxable income and tax has to be paid on that.

The current rate for MAT is 18 per cent, up from 7.5 per cent in 2001-02.

Since this is a very broad provision, sometime companies who genuinely deserve tax relief get stuck with MAT liability. Hence, a system of MAT credit entitlement was brought in.

MAT Credit

Under this system, if a company pays Minimum Alternate Tax, then the difference between the tax that would have been payable if there was no MAT and the actual tax paid under MAT regime can be carried forward as a credit and can be set off against any tax in the future that is not under the MAT regime.

For example, if a company has a book profit of Rs 10 lakh and after applying the provisions of Income tax act, arrives at a taxable income of only Rs 1 lakh, then MAT becomes applicable as 18 per cent of Rs 10 lakh is Rs 1.8 lakh. However, the difference between the tax paid on Rs 1.8 lakh and the tax calculation on Rs 1 lakh is carried forward as MAT credit.

Say, the next year, a profit of Rs 11 lakh is booked but this time due to some cost-cutting initiatives, the company calculates a taxable income of Rs 6 lakh. Hence, MAT is not applicable as the taxable income is more than 18 per cent. Here, the company can choose to set off their tax liability with the tax credit they have from the last time when they paid MAT.

Criticisms

As can be easily seen, capital intensive companies like steel & construction etc. have long been chronic victims of MAT and have lobbied for its removal ever since its inception.

A lot of them are yet to encounter a period where they haven't had to pay MAT. And considering that MAT credit can be carried forward only for a period of 10 assessment years at a time, it has led to capital erosion on account of MAT. It is another instance of short-sightedness on the part of the Government; and one among many measures which cripple our global competitiveness for short-term revenue collection.

(To be continued)

(This column has been contributed by vakilsearch ( www.vakilsearch.com ), an online legal guidance and legal solutions provider)

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