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Restructure MAT
February, 24th 2007

The countdown to the Budget 2007 has started and the financial press has begun its own quota of stories and speculation. Will major incentives be withdrawn? Will corporate tax rates be cut? Will fringe benefit tax be removed? Will the India Mauritius treaty be revisited? Imagination usually runs wild in the second half of February and of late pre-Budget seminars are arranged do discuss what is in store in the forthcoming Budget.

In some sense this is would the 60th Budget since independent India. Do the citizens of this country get something special on that day? One has to wait and see. At least every citizen who has been a witness to all the 60 budgets should get a reward of some sort. One of the stories doing the rounds is that the provisions relating to Minimum Alternative Tax (MAT) will the remodelled to align it with the Dividend Distribution tax (DDT).

The trigger for the proposal seems to be the Parthasarathi Shome report where a suggestion was made that MAT be merged with DDT and MAT should be at .75% of adjusted net worth of the company along with a 10% DDT.

In other words, MAT should be on the basis on the adjusted networth instead of the published profits which is the base today in Section 115JB of the Income Tax Act. Clearly such a proposal should be shot down on ab initio. Let us make no mistake that the origin of the Act is that it is a tax on income and is not meant to be a tax on anything else. In fact the definition of "income" is supposed to be so simple that no commercial man can misunderstand. But unfortunately today it is misunderstood in quarters without exception. Section 2(24) of the Act which defines "income" is the most complicated and clumsy provision covering 13 clauses and to get a full grasp of the provision one has to wade through a plethora of decisions on the subject.

If this is the fate of the term "income" which is the backbone of the law then less said the better for the other provisions. The final nail in the coffin was the introduction of fringe benefit tax in the law which has nothing to do with "income", but is still part of the Income Tax Act. If net worth is the basis for levy of MAT, it straightaway is not tax on income. It will be a tax on wealth since the net worth is represented by various assets created by the company. Are we then introducing wealth tax through the backdoor? If that be so let us be transparent about it and make it as part of the Wealth Tax Act instead of calling it MAT.

The author is Partner, Global Tax Advisory Services, Ernst & Young.

Secondly, the definition of net worth or capital employed as the case may be is difficult to define. Memory is still fresh on the long drawn battle which went up to the Supreme Court on what constitutes Capital employed in the context of the then Secion 80J of the Act. A company may have net worth built over a period of time but due to a bad year may have made losses. Is it fair to levy a supposed tax on "income" via the net worth route in a loss year? This would be highly illogical and bound to be contested.

Capturing the tax on the balance sheet basis as against the basis of "income" is canvassed on the ground that evasion may not be possible. Even this theory is unsound. The question of evasion is an issued of mindset and has nothing to do will law.

Unless we deal with the evaders strictly, we cannot solve this problem by tweaking the law. We have tried it in the past but without success.

Clearly the proposal speculated in the press on a tax on net worth has to be aborted forthwith. With the economy on a roll and tax collections on a continuous northward curve, there is no need to mess around with the basic framework of the law. Ideally this Budget should only announce the new tax rates and do nothing else.

R. Anand

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