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Do away with MAT
February, 21st 2007

And reduce exemptions, instead

Tinkering with the minimum alternative tax (MAT) in the name of enhancing resource mobilisation would make a mockery of the very idea of tax reforms. The reported plan to have a new MAT rate based on a companys net worth and distributed dividends, in effect merging MAT with dividend distribution tax, as recommended by the report of the advisory group on tax policy and tax administration, sounds like a simplification move. Since it involves changing the tax base from book profits to net worth, it sounds rational, too. However, from a wider perspective, it amounts to little more than an inconsequential fiddle with something that should not exist in the first place. MAT is a pay-this-at-the-very-least tax for companies that somehow claim so many exemptions that their tax burden is zero. This in itself is a gem of muddled reasoning. The Indian tax structure is a veritable maze of exemptions, and MAT seems to sayif you find all the escape hatches and loopholes, congratulations, but we still want to nab you because nobody gets off free. This is absurd.

What India needs is a clear system that has no exemptions. The last Budget puts the total corporate taxes forgone in 2004-05 at Rs 57,872 crore, which is at least five times more than revenues sought to be garnered through the MAT rejig. So, by the twin canons of transparency and simplicity, why not clear the maze and have everyone cough up their due? This would be a good way to fill coffers with corporate tax payments, and would render MAT obsolete. Having the left hand take away what the right hand has given merely lowers the prestige of taxation as an institution, opening it to ridicule. That the corporate sector needs an open, rational system of taxation is made all the more critical by its increasing contribution to the overall tax kitty. Corporate Indias tax contribution has doubled over the decade to 3.4% of GDP, making it the single largest tax source for the governmentfor the first time ever, this year. It has overtaken excise, an indirect tax. This makes for a progressive transformation of the tax base, and should be encouraged. Good taxation policy will do just that.

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