Can MAT help ensure equity among corporate taxpayers?
February, 16th 2007
In India minimum alternate tax (MAT) provisions were introduced, as a measure of equity, to tax companies on the basis of their ability to pay and to discourage companies from arranging tax affairs in a manner which would result in huge book profits and substantial dividend payout but no tax liability.
It is worthwhile to note that such differences arise due to variations between tax and book deprecation, accounting of deferred revenue expenditure, tax incentives, etc. The history of MAT provisions in India can be traced back to Section 80VVA of the Income-tax Act, 1961 (the Act). This section was introduced by the Finance Act 1983 and restricted certain incentive deductions. Thereafter, the erstwhile section 115J was introduced by the Finance Act 1987, followed by erstwhile section 115JA that was introduced by the Finance (No. 2) Act 1996
Under the current provisions of Section 115JB that was introduced by the Finance Act 2000, if the tax payable on total income computed under the Act is less than 10% of the book profits of the company, the tax payable for the said period will be 10% of such book profit. The manner in which the book profits are to be computed has been specifically provided.
HurdlesSection 115JB has been the subject matter of extensive litigation on several fronts. A few key issues are outlined below:
There seems to be a disparity in the applicability of MAT to various taxpayers enjoying an income-tax holiday. To illustrate, MAT does not apply to units eligible for tax holiday under Sections 10A/10B (Units in STPI, EOUs etc). However, taxpayers who have made substantial investments for setting-up industrial undertakings for power generation or infrastructure facilities and are eligible for similar tax holidays are still subject to MAT.
Similarly, under the current provisions long-term capital gain is considered as a part of book profit although the taxpayer has made investment in prescribed bonds for claiming tax exemption. This seems to be an unintentional contradiction, as legislation would not like to encourage taxpayers to make investment in bonds and at the same time take away the benefit by taxing it under MAT.
For computing book profits, the brought forward loss or unabsorbed depreciation as per books of accounts, whichever is lower, is allowed as a deduction. In a situation where the unabsorbed depreciation is nil but there are unabsorbed losses, it results in an absurd situation as the amount that would be eligible for a reduction in computing the book profits would be nil. It has been long-standing demand of the taxpayers that both should be allowed to be setoff.
Section 115 JB was introduced to simplify the legal complications of erstwhile Section 115JA. However, this has resulted into disparities discussed above, which need immediate attention. Having said that, there have been several representations to the government to abolish the MAT levy. It is pertinent to note that the Vijay Kelkar Committee report on reform of direct taxes recommended abolition of MAT and alignment of taxable income and book profit. While it is more or less a settled law that MAT is applicable to foreign companies having a permanent establishment in India, with Indian businesses going global and substantial increase in cross-border trade, MAT provisions would require further fine tuning for taxes paid abroad.
The concept of MAT is not exclusive to India and it exists in several countries such as Austria, Canada, Mauritius, Mexico, Spain and USA. The US mechanism merits further discussion. USA has a mechanism of alternative minimum tax (similar to MAT in India), introduced in 1978, and it applies to individuals as well as trusts (in India it currently applies to companies only).
AMT works as a separate tax system in the US with its own allowable deductions and credit limitations. The tax is imposed at a flat rate of 20% on AMT income. To the extent AMT exceeds regular tax, a minimum tax credit is generated and carried forward to offset the taxpayers regular tax to the extent it exceeds AMT in future years. Further, AMT exemption applies to small business corporations that meet certain criteria.
RAJESH DHUME & SAMIR KANABAR (Authors are with Ernst & Young)