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Hike in MAT to hurt oil & IT firms most

Hike in MAT to hurt oil & IT firms most
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First Published: Sat, Feb 27 2010. 12 35 AM IST
Updated: Sat, Feb 27 2010. 12 35 AM IST
Mumbai: Large firms such as Reliance Industries Ltd (RIL) and Tata Consultancy Services Ltd (TCS) will have to shell out more in the fiscal beginning 1 April, with the government raising the rate of minimum alternate tax, or MAT.
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Finance minister Pranab Mukherjee has in the Budget proposed to increase MAT to 18% (of book profit) from 15%. In the 2009 budget, Mukherjee had hiked MAT to 15% from 10%.
MAT was introduced by then finance minister P. Chidambaram in 1997-98 to plug a gap in the tax system that allowed companies with book profits and large capex to not pay taxes thanks to high depreciation charges.
Oil and gas explorers, petroleum refineries and information technology (IT) firms, as well as companies that have set up operations in economically backward regions such as the North-East to avail tax holidays, will be the most affected by the hike, say analysts.
“The biggest negative across sectors, including infrastructure, would be the increase in the minimum alternate tax,” said G.V.K. Reddy, chairman of GVK Power and Infrastructure Ltd.
The additional Rs20,000 tax relief for individual investors subscribing to infrastructure bonds, however, was a positive, he said.
Uday Ved, executive director and head of tax practice at consulting firm KPMG India Pvt. Ltd, said companies would actually “have to pay 19.93% MAT, including a 3% cess on their book profits, (up) from the present 16.99%, which will affect their cash flows.”
Many IT firms have been paying at a 15% effective tax rate and enjoying tax benefits by operating out of software technology parks, established to promote the sector.
The scheme expires next year and IT companies have been bracing for higher tax rates.
S. Mahalingam, chief financial officer of TCS, India’s largest software firm, said the MAT hike would have an impact on cash flow, but it wouldn’t be significant for TCS as the company was expecting an increase in its effective tax rate to 18% in the next fiscal.
The increase in MAT “would result in higher outgo of cash in the short term and would affect Indian corporates adversely,” said Surjeet Singh, chief financial officer, Patni Computer Systems Ltd. “However, this impact has been cushioned to a large extent by lowering of corporate surcharge from 10.0% to 7.5%.”
Maulik Patel, head of research at brokerage KR Choksey Shares and Securities Pvt. Ltd, said there was nothing in the Budget for oil and gas exploration companies.
“There was no clarity on whether the tax holiday will be applicable on the investment incurred by gas producers under Nelp 1-7 rounds or when the (Kirit) Parikh report will be implemented,” he said.
These firms have been paying only MAT and, Patel estimates, the rise in the tax floor would hurt profits by 1-3%.
Another energy sector analyst with the Indian arm of a foreign brokerage said, on condition of anonymity, that RIL’s profits would see “a marginal impact” as it “already enjoys so many other exemptions.”
Bhuma Shrivastava and Lison Joseph in Mumbai contributed to this story.
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First Published: Sat, Feb 27 2010. 12 35 AM IST
More Topics: Budget 2010 | Tax | MAT | Oil | Information Technology |