The minimum alternate tax (MAT) provisions require payment of minimum tax by corporates regardless of there being tax losses or tax incentives.
At present, if the tax payable under normal tax provisions is less than 19.93% of the book profit, MAT at 19.93% of book profit is payable. The book profit is computed after making certain adjustments to profit as per books. The list of such adjustments is increasing each year, thereby widening the gap between profit as per the accounts and the profit on which MAT is payable. The notable adjustments are inclusion of expenditure related to exempt income, deferred tax, exempt long-term capital gains and diminution in value of assets.
The MAT paid can be credited in future when the company starts paying tax under normal provisions. However, regardless of the amount of MAT credit available, minimum tax at 18% of book profits under MAT must be paid each year thereby limiting the use of MAT credit. The unused MAT credit can be carried forward for 10 years.
The MAT was first introduced in 1986-87 when the
applicable rate was 15.75%. The MAT was discontinued from 1990-91 and reintroduced in 1996-97 when the effective rate was 11.87%.
In the last decade, the MAT increase has been significantly higher without a proportionate reduction in corporate tax rate resulting in narrowing of gap between corporate tax and MAT.
What will be the fate of the MAT rate in the forthcoming budget particularly when the proposed direct taxes code will peg MAT at 20%.
The consistent increase over the last few years hints that the government intends to bring more and more companies within tax net.
Does this increase provide a level-playing field for the corporate world? In the initial years, MAT liability was moderate having regard to deduction provided for certain incentives and the MAT rate. However, MAT provisions as they stand today resulted in exponential increase in MAT liability.
On one hand scope of book profit subjected to MAT is expanded and on the other hand the MAT rate is also increased. This acts as a deterrent for the corporates in certain situations.
Due to opening up of Indian economy and also with the globalisation, the competition in the market has increased. This has resulted into reduction of margins. Though the MAT credit is available in the future, the payment of MAT has become cash flow issue for the companies. For the company which is engaged in infrastructure development, MAT makes the project more costly due to uneven cash flow.
Therefore, there is a need to relook at the MAT provisions. Looking at the current fiscal regime, it appears that budgetary deficit may not support abolishing the MAT, hence a balanced approach may be adopted whereby either infrastructure companies and companies in start-up phase (3-5 years) are excluded from the MAT provision or computation of book profit for such companies is rationalised.
IFRS may also impact the MAT liability as the profit in the books will be based on fair value accounting and before actual realisation of profits.
Considering the fact that in the DTC Bill 2010, the MAT rate proposed is 20%, it is not likely that MAT rate will be reduced in the coming budget hence it is necessary to relook at computation of book profit provisions to reduce hardship for start-up and infrastructure companies.
Ashesh Safi is Partner, and Geeta Ramrakhiani is senior manager, Deloitte Haskins & Sells