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Govt mulls move to hike MAT

business Updated: Jan 26, 2011 20:34 IST
HT Correspondent

The government may raise the minimum alternate tax (MAT) to 20% on book profits from the current 18%, a move that could trigger protests from the industry lobbying for a cut in MAT in Budget 2011-12.

A higher MAT is one of the ways through which the government might be looking at increasing the effective rate of corporate taxation.

At present, the average effective tax rate for corporations is 22.78%, which is substantially lower than the statutory tax rate of 30.0%.

Importantly, the effective tax rate for private companies is lower at 21.56 % compared to government-owned companies that pay an effective tax rate of 27.14%.

“It is necessary to bring the effective rate of taxation closer to the statutory rate,” said an official who did not wish to be identified.

MAT was introduced in 1997 to address inequity in taxation of Indian corporations. Many companies, despite making book profits as per their profit and loss account, were hardly paying any tax because of a large number of exemptions.

Such exemptions, deductions, and other incentives under the Income Tax Act such as liberal rates of depreciation had led to the emergence of “zero tax” companies, which inspite of having high book profits are able to cut their taxable income to nil.

The argument for a higher MAT rate at 20% is also driven by the fact that the runaway price line has upset the government’s plans of implementing a carefully-calibrated exit plan of the fiscal stimulus package in this year’s budget.

Originally, the government had planned a two percentage point hike from 10 to 12 % in central excise duty on 90% of the manufactured goods in this year’s budget.

This appears unlikely and the government may have to bank upon a higher MAT for additional revenues.

Industry, on the other hand, has demanded a cut in MAT rates. “It is necessary to rationalise the MAT as a specified percentage — 50 % — of basic corporate tax rate,” industry chamber Ficci said in its pre-budget memorandum.

This would translate into a MAT of 15% at current corporate income tax of 30%.

“Over the last four years, the rate has gone up from 10% to 18%, which has caused great anxiety,” Ficci said.