A slight cut in corporate tax rates appears imminent in the forthcoming Budget 2017.What attains more significance is the possibility of a reduction in Minimum Alternate Tax (MAT) rates, which have increased over the past few years even as corporate tax rates have remained static (see table).

MAT provisions, as they largely stand now, draw their genesis from the Finance Act, 2000, which introduced tax at 7.5% of book profits. The corporate tax rate was then 35%, which in subsequent years declined to 30%.Over the years, not only have MAT rates risen, but the ambit has also been expanded. For instance, both SEZ developers and SEZ units were brought within the MAT ambit from the financial year 2011-12 onwards.

A high MAT rate of 18.5% adversely impacts the cash flow of companies that have low taxable income or have incurred losses. Further, it also dilutes the tax incentives otherwise available to business entities.

Government sources admit that rationalisation of MAT has been on the cards. However, no additional MAT-related concessions are expected to be available for SEZ developers and units, which will continue to be covered by its provisions. Apart from discussions relating to a possible reduction in the MAT rate by a few percentage points, the other point of deliberation in the run-up to budget relates to the period available for carryforward and set-off of MAT credit against normal taxes.

The FM in his budget speech in 2015 had promised a slash in corporate tax rate from 30% to 25% over four years. For the current financial year (FY) commencing April 1, 2016, companies are entitled to a reduced corporate tax rate of 29% only if their total turnover during FY 2014-15 did not exceed Rs 5 crore. New manufacturing companies have an option of a lower corporate tax rate of 25% if they don't claim any profit or investment-linked deductions.

“There is a case for the government to review the MAT rate given that it should bear semblance with the prevailing corporate tax rates. The 7.5% rate existed when the basic corporate tax rate was 30% and if the budget is announcing a road map for reduction of corporate tax rate, there is a case to revise the MAT rate downwards, if the law makers can't do away it. Given that the phasing out of exemptions has commenced, translating into higher effective corporate tax rates, perhaps the policy itself for levy of MAT should be reviewed,“ says Mukesh Butani, managing partner, BMR Legal.

Punit Shah, tax partner, Dhruva Advisors, adds, “When the FM laid down the road map for reduction in corporate tax rate along with corresponding phasing out of exemptions and deductions over a four-year period, the logical corollary that the FM should have touched upon in the road map was reduction or removal of MAT. Any cut in corporate tax rate this year should see a simultaneous reduction in MAT rate. While reduction in MAT rate would be an immediate measure, for the long run, the period of time for which MAT credit is available should also be extended.“