ASSET-BASED MAT-A BANE?

MAT (Minimum Alternate Tax) was introduced in 1983 because of the replication of the zero-tax paying company's strategy of the US in India. Plenty of Companies in the USA with huge pre-tax profits did not pay any tax at all! They used to declare huge dividends and escaped contributing to the fiscal income of the country. This seemed irrational, and hence various forms of MAT (AMT in USA) were introduced in various countries including India, USA, Mexico, etc, which was widely appreciated.

In India, the history of MAT from "deemed total income" to "deemed tax" to the current proposed "asset based" tax is as follows:

· Introduction of section 80VVA in 1983 which laid down certain restrictions on aggregate amount of deduction allowed from the total income and was applicable for AY 1984-85 to 1987-88.

· Then, section 115J was introduced on 1st April 1988 under which if the total income was less than 30% of the book profits, the total income charged to profits was 30% of the book profits. This was in operation for AY 1988-89 to 1990-91.

· In 1991-92, with a view to rationalize the tax structure, and discontinuance of Investment incentives, MAT was phased out.

· After 6 years, MAT was introduced in AY 1997-98 under section 115 JA.

· In the next year, in 1998-99, section 115 JAA was introduced to give effect to tax credit scheme by which tax paid under MAT was allowed to be carried forward for set-off against regular tax paid in subsequent 5 years.

· In 2000, another section 115 JB was introduced. Rather than computing "deemed total income", the focus was on introducing "deemed tax" for the computation of minimum deemed tax. The provision for credit under section 115 JJA was discontinued. MAT @ 7.5% of book profits was levied including surcharge.

· In 2005, Tax credit was again allowed under MAT.

· In 2006-07, MAT was increased from 7.5% to 10%, and the credit period increased from 5 years to 7 years.

· In 2007-08, this 11.33% tax was applied to IT companies which so far, have been exempt. Also, it was extended to some exempted export incomes.

· Finally, the MAT was increased from 10% to 15%.

With a view to rationalize the tax structure, the new tax code 2009, applicable from April 2011, brings out a radical change in the computation of MAT. It now would be 2% of the Gross Assets (Net Fixed Assets plus all assets excluding negative balance of P/L Account). The similar rates for banks would be .5%.

This seems to be completely absurd, and is bad news for the highly capital intensive companies like infrastructure or manufacturing and even IT companies. Recently, my VP had asked to study the impact of the new guidelines on one the projects we had appraised, and to my surprise, this MAT (terminology-wise) is no more "minimum". Infact, the normal corporate tax was much lower than MAT. Given, this new provision, the question of taking higher of the two, I presume, should not apply. But, the guidelines propose the higher of the two, which again defeats the original intent behind the introduction of MAT.

The Govt calls it a revenue neutral proposal, which, to my understanding is not so. MAT would force companies to pay tax inspite of their inability to pay! Since assets and ones profitability is de-linked, there could be a case where the Company is forced to pay huge MAT inspite of no/-ve pre-tax profits. Further, even the provision of phasing out of credit provision is being proposed in the bill. Thus, loss making infrastructure behind would be required to pay MAT, inspite of their inability. So, it would emerge as a huge bane. However, there seems to be little possibility of it going through.