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MAT raised to 18.5%

business Updated: Feb 28, 2011 23:49 IST

Hindustan Times
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The government on Monday proposed to raise the Minimum Alternate Tax (MAT) to 18.5% on book profits, widened the ambit of MAT to include developers of special economic zones (SEZs) as well as units operating in these duty free enclaves.

“As a measure to ensure equal sharing of the corporate tax liability, I propose to levy MAT on developers of SEZs as well as units operating in SEZs,” said Pranab Mukherjee, finance minister in his budget speech.

The government also proposed to reduce the surcharge on corporate income tax to 5% from 7.5%. “In the case of corporates, my initiative of phasing out the surcharge continues,” he said.

A higher MAT is one of the ways through which the government is looking at increasing the effective rate of corporate taxation. For 2009-10 the average effective tax rate for corporations was 23.6%, which was substantially lower than the statutory tax rate of 30%.

Importantly, the effective tax rate for private companies is lower at 23.0% as compared with the government-owned companies that paid an effective tax rate of 25.36%.

MAT was introduced in 1997 to address inequity in taxation of Indian companies. 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 profit are able to reduce their taxable income to nil.

MAT was introduced to address such inequities. Mukherrje had increased MAT from 15% to 18% last year. “It is a major setback for both developers and units in the SEZ,” said Manoj Goyal, vice president, Raheja Developers.

(Research inputs by Deloitte)