Ideally, distribution tax should be allowed to be carried forward infinitely for set off against the actual tax liability. As it is, to the extent of distribution tax, there is indeed a double taxation.
"Isko uttar disha ki aur chod doh" (release the (arrow) towards north), or words to that effect, have been the sage counsel in our epics, which have it that a missile once taken out cannot be put back and, hence, has to be directed at someone even though the enemy in front has surrendered.
It is perhaps in the same spirit that the Parthasarathy Shome Committee has made a strong pitch for ushering in a regime of tax for corporates based on their net worth. Many tax pundits have in the past suggested presumptive taxation on a large front to widen the tax base which, as it is, targets largely the corporates and the salaried class leaving the unorganised sector practically untouched.
The committee perhaps toyed with the idea but ended up directing it at the corporates . While in the epics, the arrows were released towards perceived abodes of evil, the committee sadly wants the arrow to target the corporates which are by no means evil.
Signs of wealth
Columbia reportedly taxed its residents not on the basis of their actual income but on the bases of visible signs of wealth they owned number of swanky cars, yacht, aircraft, bungalows, etc. Back home, the committee would want our Government to modify the existing scheme of Minimum Alternative Tax (MAT) which, at present, extracts from the corporates a tax at the rate of 10 per cent of the book profits should that be greater than the actual tax payable to extract 0.75 per cent of its net worth plus 10 per cent of the dividend distributed. Both miss the tree for woods.
There is no warrant to assume that a swanky bungalow owner also enjoys considerable income given the fact that like gold a bungalow can only be a showpiece unless rented out or reverse mortgaged, a new concept doing the rounds especially in the elderly circles.
Likewise, there is no warrant to assume that profit is a function of a company's net worth.
Furthermore, one can immediately think of at least two inequities emanating from the proposed dispensation companies having a huge debt component in their capital structure would be let off lightly vis--vis the ones that have a huge equity component, such as Reliance Industries Ltd, given the fact that by definition net worth means shareholders' funds, and, second, even loss-making companies, which are not even required to pay MAT under the extant regime, would be roped in by the proposed new regime.
On the MAT
And should this happen, it would now be a second dose of tax for loss-making companies they would be hit by FBT (Fringe Benefit Tax) as well as MAT, whereas in all fairness they should be hit by neither. Remember, the FBT regime also targets indiscriminately every employer irrespective of whether he makes profits or not.
One wishes the committee had recommended integration of the distribution tax regime with the actual tax system and not with the MAT regime.
In India, distribution tax is over and above corporate tax, whereas in the UK it abates against a company's corporate tax liability in the final assessment. In other words, in that country, distribution tax is perceived as a form of advance tax. This is as it should be.
By integrating the distribution tax regime with the MAT regime, another farce would be perpetrated on the corporates.
As it is, the excess tax paid, thanks to MAT, is allowed to be carried forward for seven years but is available for set off only if in those seven years there is taxable profit in excess of the amount on which MAT would have been paid.
What this gobbledygook means is every year, come what may, a minimum tax in cash has to be paid. This renders the carry forward benefit of excess tax paid on account of MAT rather illusory. And there would be a heightened farce when the heightened MAT (now swelled by distribution tax as well) seeks set off in vain. Because no company can possibly suspend payment of dividend only to claim set off of the MAT that runs the risk of lapsing after a seven years.
Pluses of carry forward
Ideally, distribution tax should be allowed to be carried forward infinitely for set off against the actual tax liability. And this would serve two purposes at once. It would fetch something for the government simultaneously when the shareholders are paid, and, second, it would end the vexed problem of double taxation of dividend. As it is, to the extent of distribution tax, there is indeed a double taxation of corporate profits.
Pray what does the committee want to achieve by this convoluted proposal except squeezing more out of the already over-taxed corporate sector. It would have done well instead to sublimate its energies towards fine-tuning the presumptive tax schemes in respect of retailers, truckers and civil contractors to make them workable. As it is, these schemes are languishing for want of proper enforcement.
S. Murlidharan (The author is a Delhi-based chartered accountant.)