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MAT norms may be tweaked
February, 20th 2007

Minimum alternate tax (MAT) may be in for some structural rejig in the Budget. The government is looking at expanding the scope of the tax currently applicable on certain zero-tax companies.

The options that are being examined include expanding MAT to cover units taking benefits of the STPI scheme, to bring big IT companies into the tax net. But this will happen only if the scheme is extended. A decision in this regard will be taken at the highest level. The current thinking is in line with the finance ministrys views of reviewing exemptions.

If you look at it from the governments viewpoint, expanding the scope of MAT would help bring more tax payers into the net. From industrys viewpoint, levying MAT would not augur well without extending the tax waivers available under Section 10A to STPIs, BMR & Associates, partner, Mukesh Butani said.

While expanding the scope, the government is also exploring ways to bring in some structural changes. The Parthasarathi Shome committee had recommended that instead of taking 30% of book profit for calculation of MAT, a percentage of total turnover should be fixed. It was of the view that the criterion of book profit had let to a lot of litigation. Industry has also demanded that the government should review the decision to include long-term capital gains in the book profit. This provision was inserted last Budget.

What are zero-tax companies

Normally, a company is liable to pay tax on the income computed in accordance with the provisions of the I-T Act, but the profit and loss account of the company is prepared as per provisions of the Companies Act. There were a large number of companies who had book profits as per their profit and loss account but were not paying any tax because income computed as per provisions of the I-T Act was either nil or negative or insignificant. In such case, although the companies were showing book profits and declaring dividends to the shareholders, they were not paying any income tax. These companies were popularly known as zero-tax companies.


In order to bring zero-tax companies under the Income Tax Act net, Section 115J was introduced w.e.f assessment year 1988-89 to provide for payment of MAT. According to this section, if the taxable income of a company computed under this Act in respect of the previous year and onwards is less than 30% of its book profit, the total income of such company chargeable to tax for the relevant previous year shall be deemed to be an amount equal to 30% of such book profit.

How has MAT worked in India

The provision was removed in 1991-92 but reintroduced in 1997-98 under Section 115JA. The government hiked the MAT rate from 7.5% to 10% in the last Budget.

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