Corporate tax legislation all over the world, no matter how streamlined at the outset, becomes subject to a “creeping incrementalism”. The legislature noticed that on account of various tax incentives and allowances, a company which earned book profits and distributed dividends, did not pay tax and therefore fell within the category of “zero tax company”. The legislative history of introducing provisions for MAT dates back to year 1984.

ALTERNATE MINIMUM TAX

Ever since introduction of Section 115JB, the Government is increasing the rate at which MAT is paid under section 115JB, thereby reducing the gap in between the rate as per the normal provisions of the Act and the MAT rate and widening the adjustments to be made to book profits.

All the above goes on to show that the legislature intended introducing the MAT provisions to reduce the distortionary impact of tax incentives. The result is that so-called “zero tax companies” too pay a minimum tax.

Since its introduction, MAT would have witnessed changes almost in all the Union Budgets proposed by the Finance Minister, and this year's budget proposal was no exception. A few changes are proposed in MAT and in Alternate Minimum Tax (‘AMT') in this year's Budget, too. The concept of AMT is similar to the MAT with the difference in its applicability to certain form of organisations and computation mechanism. AMT was introduced in last year's Budget for limited liability partnerships (‘LLP').

LLP lost its lucrativeness as a tax effective business vehicle the moment AMT became applicable on it from the Budget 2011-12. The legislator prompted this action to save revenue which was escaping with companies converting to LLP's and rationalising/aligning taxation of LLPs with that of companies. The advent of AMT on LLP cast a levy of 18.5 per cent plus surcharge and cess which translates into 20.484 per cent tax on its adjusted total income. Unlike companies, LLPs have no concept of book profit and hence, they have to pay AMT on their adjusted total income (equivalent to adjusted taxable income).

Changes in AMT

Under the existing provisions of the Act, AMT is levied on LLPs and no such tax is levied on the other form of business organisations, such as partnership firms, sole proprietorship, association of persons, individuals, etc.

In order to widen the tax base, the Budget (2012-13) proposed that a person other than a company, who has claimed deduction under any section (i.e. Sections 80H to 80RRA, other than Section 80P) included in Chapter VI-A under the heading “C – Deductions in respect of certain incomes” or under section 10AA, shall be liable to pay AMT.

Under the proposed amendments, where the regular income-tax payable for a previous year by a person (other than a company) is less than AMT payable for such previous year, the adjusted total income shall deemed to be the total income of such person, liable to pay tax @ 18.5% (plus surcharge and cess).

This year's Budget proposed changes in MAT which are summarised as follows: MAT scope widened to cover insurance companies, banking companies or electricity companies; ‘book profit' is to be increased by the amount standing in the revaluation reserve relating to the revalued asset which has been retired or disposed, if the same is not credited to the profit and loss account. Looking at the narrowing gap between MAT and normal tax rate, the Government is pushing the companies to aim at achieving higher efficiencies.

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