The government may retain profit as the key condition for levying minimum alternate tax (MAT) in the final draft of the direct taxes code after its asset-based approach proposed earlier ran into a storm of protests from industry.

Other options being considered by the government include tax exemptions for asset-heavy infrastructure companies and start-ups, and a lower rate for MAT, a senior government official told ET. The proposed direct taxes code, which was unveiled by the government in August and aims to simplify the countrys comnplex tax laws, suggested gross assets as the basis for levying MAT, which industry argues will penalise asset-heavy companies.

We have an open mind on the issue of MAT, the official said, requesting anonymity. MAT is levied on companies that do not pay income tax because of exemptions.

Returning to the old system of levying 15% MAT on a companys book profit computed under the Companies Act and using net assets as the basis for taxation are among various options being examined by the finance ministry. Industry says the proposed 2% tax on gross assets is too steep as it assumes returns of more than than 8%. Banking companies have to pay 0.25% of their assets as MAT.

An information technology firm would have fewer assets as its primary resource is employees. But an infrastructure company will largely have fixed assets and a gross asset basis of levying MAT could imposing a greater liability on such a firm.

The government has already begun spadework on the final draft of the DTC legislation after taking feedback from the industry and is hopeful of 
introducing it in the forthcoming winter session of Parliament. The code has argued that levying MAT on gross assets will encourage optimal utilisation of assets and increase efficiency. Taxation experts do not agree with this line of argument.

It will have a negative impact on the infrastructure sector. The new proposal seeks to penalise people who are building this country and is not in sync with reality, said Vinayak Chatterjee, chairman of Feedback Ventures, a New Delhi-based consulting firm. Industry officials say the new norms could act as a strong disincentive for investments in assets. Investment companies will not be able to set off MAT against their final tax liability as MAT is proposed as a final tax.

Book profit basis is a tried and tested model and one should continue with it, may be at a higher rate, said Amitabh Singh, partner at Ernst & Young. The provision in its current form could also potentially apply to foreign companies even if they do not have a branch presence in India. Most countries would give credit only for foreign taxes that are levied on income. A tax on assets may, therefore, become ineligible for foreign tax credit in the country of residence.

Another government official, however, said the proposed MAT was just a transitory tax and had been proposed to allow the government to get some revenues while it grandfathers tax exemptions already in force. The new code seeks to phase out the various tax exemptions available to corporates, but compensates for the same by lowering the corporate tax rate to 25% from around 34% now. Without the MAT, there could be a sharp drop in the governments tax revenues.

Presently, a company is liable to pay tax on income computed in accordance with the provisions of the Income Tax Act. However, the profit and loss account of the company is prepared as per provisions of the Companies Act.

A number of companies showed profits in their profit and loss accounts, but did not pay any tax because income computed as per provisions of the Income Tax Act was either nil or negative due to tax holidays. To bring these zero tax companies, a minimum alternate tax was introduced in 1997-98.