Minimum Alternate Tax (MAT) applies in situations where there is low or no taxable income, however the books of accounts reflect accounting profits. Generally, MAT situation arises in case of companies, which claim tax incentives or in case of capital intensive companies due to high tax depreciation in the initial years of incorporation. This gap was sought to be narrowed by requiring payment of some minimum tax by companies even if the liability of payment of tax was otherwise not there or was very low.
One can be sure that no ready reply will be forthcoming from our tax legislators as to why in the first instance, they propose various forms of tax incentives for making investments whether they be capital investments per se or investments in certain areas or sectors, and when the companies start availing such legitimate incentives which results in a nil or low taxable profits, they are forced to cough up MAT which undermines the efficacy of such incentives. This only emphasize the myopic approach adopted in our law making process.
Historically, corporate sector has always faced the brunt of some additional levy in one form or other. For example, for several years till 1987, apart from tax on its income, a company was required to pay additional tax u/s 104 on its profit not distributed as dividend.
|Section Number||Introduced by||Abolished by|
|Section 80VVA||Finance Act, 1983||Finance Act, 1987|
|Section 115J||Finance Act, 1987||Finance Act, 1990|
|Section 115 JA||Finance (No 2) Act, 1996||Finance Act, 2000|
|Section 115JB||Finance Act, 2000||Continues as of date|
There have also been instances of tax on super profits. Take for instance, Super Profits Tax Act, 1963 and the Companies (Profits) Surtax Act, 1964 that imposed a special tax on excess profits of companies. Fortunately, these taxes stand abolished. The base of these taxes was the excess of the profit over the capital of the company computed in specified manner.
Legislative history of MAT provisions
One can say that the current provisions of MAT are nothing but a form of excess tax. Section 80VVA, which was inserted by the Finance Act, 1983, with effect from 1 April 1984, was the forerunner to the concept of MAT. This section provided to restrict various incentives to 70% of the pre-incentive income and to pay tax at least on 30% of such income.
Later, section 115J (one can say, the first MAT provision) was introduced by the Finance Act, 1987, with effect from 1 April 1999. It linked for the first time the tax payable with the profit as per the books of accounts of the company (ie: book profits). Section 115J provided that tax will have to be paid at least on income equivalent to 30% of book profit. Since, the provision became dispute prone, it was withdrawn by the Finance Act, 1990.
Since then we have witnessed introduction and abolition of various MAT provisions with umpteen variations such as allowing for MAT credit (see table). The current MAT provisions – section 115JB were introduced by the Finance Act, 2000 and originally provided for levy of tax at a minimum rate of 7.5% on adjusted book profits. This rate currently stands at 10%.
An endless bout of litigation
The concept of tax on adjusted book profits has led to a host of litigation on various issues. For instance, tax provisions allow the adjustment of brought forward loss or depreciation whichever is less as per the books of accounts for arriving at the book profits chargeable to MAT. The Act does not specify a particular method for determining the brought forward amount, but there is some guidance provided in a Central Board of Direct Taxes (CBDT) circular (Circular no. 495 dated 22 September 1987). Yet, the manner of computation has been interpreted differently by various appellate authorities resulting in an endless bout of litigation.
Moreover, the very fact of providing for a brought forward and set off of carry forward loss or deprecation; whichever is less itself is inequitable.
MAT, should be applicable, when there is actual profit after deducting both the carry forward loss and unabsorbed depreciation from the book profit and not the lower of the two. Else, companies where depreciation element is low such as finance companies, but who are making consistent losses – owing to business environment, will have to pay MAT despite heavy carry forward losses. Likewise, companies that are making nominal profit or loss before depreciation but the depreciation charge being very heavy will be liable for MAT in the year in which there is net profit after depreciation irrespective of the fact of heavy unabsorbed depreciation.
The law is also silent about the applicability of MAT for foreign companies (say those having just a liaison office or branch office in India). The requirement of MAT that profit and loss account should be same as approved in annual general meeting in accordance with the provisions of the Companies Act, 1956, indicates the intention of legislation that MAT is not intended on a foreign company. Moreoever foreign companies are taxed at a higher rate in India, at a basic tax rate of 40% instead of 30%, presumably because they do not declare and distribute dividends in India. Thus, the case for levy of MAT on foreign companies is further weakened.
It must be noted that these are just two examples of anomalies in the MAT provisions.
Case for abolition of MAT
Those in favour of MAT attempt to argue that it is logical that all companies should pay at least a minimum tax. However, a ‘nil’ or ‘zero’ taxable income and a high book profit, arises not because of any fraudulence on account of tax payer, but because of availing of various incentives allowed by the Act.
It is typically the case that capital intensive companies (having huge investment in capital goods and machinery) may have zeroed or low tax liability in initial years of growth. These companies would be paying indirect taxes such as custom duty, excise, VAT etc and would also contribute significantly in employment generation leading to overall economic growth.
MAT was nothing but a solution to bridge the difference between book profits and taxable profits, this bridge is being narrowed through reduction in depreciation rates and phasing of various exemptions. Reduction in tax depreciation for plant and machinery from a high of 25% to 15% by the Finance Act, 2005 has already significantly narrowed the disparity between book profits and taxable profits.
The pros and cons of an alternative tax mechanism, such as MAT, has been matter of intense debate world over. Prudently most countries have not introduced MAT or its variations. Not only does MAT dampen growth initiatives by the corporate sector but it increases administrative costs for the tax payer and the revenue. There is a need for its complete withdrawal, without the introduction of another variant of MAT.
Ganesh Raj is Tax Partner, Policy Advisory Group, Ernst & Young