Sunday, May 10, 2015

Analysis on Minimum alternate tax

Taxation on income is a vital source of revenue for
our government. Although companies have to follow a
mind- bogglingly procedure, the list of exemptions
and deductions is long. As a result, a lot of companies
used these deductions and exemptions and escaped
tax liability. While they enjoyed book profits as per
their profit and loss accounts (and sometimes even
distributed dividends), tax liability as per income tax
act was either nil or negative or insignificant. In such
case, although the companies were showing book
profits and declaring dividends to the shareholders,
they were not paying any income tax, these
companies are popularly known as zero tax
companies. To counter this problem the government
came up with the concept of minimum alternate tax
(MAT) in the financial year 1997-1998 in order to
bring such companies under the income tax act net.
The whole concept of Minimum Alternate Tax (MAT)
was introduced in the direct tax system to make sure
that companies having large profits and declaring
substantial dividends to shareholders but not paying
tax to the government. By taking advantage of the
various incentives and exemptions provided in the
income- tax act pay a fixed percentage of book profit
as minimum alternate tax. Though there has been a
consistent demand from companies from various
sectors for its removal, the government continues
with this tax. Looking at the proposed provisions of
direct tax code (DTC), it appears that the government
is very clear that it wants to continue with MAT.
As per section- 115 JA of the Income Tax Act, which
was inserted w.e.f assessment year1997-98,
according to this section if the taxable income of a
company computed under this act, in respect of
previous year 1996-97 and onwards is less than 30%
of its book, then the total income of such company is
chargeable to tax for the relevant previous year shall
be deemed to an amount equal to 30% of such book
profits. Then afterwards the finance act, 2000 inserted
section 115JB of the Income tax Act, 1961, with effect
from 01-04-2001 i.e. from the assessment year
2001-02 providing for levy of Minimum Alternate Tax
on companies. Section 115JB conceptually differs
from the previous section 115JA, which provided for
MAT on companies, so far as it does not deem any
part or the whole book profit as total income.
However, the current rate for MAT is 18% which was
before at 7.5% during 2001-2002. Since this is very
broad provision, sometimes companies who genuinely
deserve tax relief get stuck with mat liability. Hence, a
system of MAT credit entitlement was brought in. an
example to illustrate the provision is as follows: AB
Pvt Ltd has a tax liability on its normal taxable
income of ₹ 3 lakhs. AB Pvt Ltd has a book profit of ₹
20 lakhs as computed under section 115JB. Therefore
as per section 115JB, tax on the book profit would be
₹ 3.70 lakhs. Hence, AB Pvt Ltd, has to pay tax MAT
(i.e. ₹ 3.70 lakhs), since the normal tax liability (₹
3.00 lakhs) is less than 18.5% of the book profit. So
following two points should be kept in mind:-
1. Tax payable at normal rates prescribed by the
finance act
2. Minimum alternate tax @ 18.5% of the book
profit of the company computed in accordance
with section 115JB.
Book profit means the net profit as shown in the profit
and loss account for the relevant previous year as
increased by
1. The amount of income-tax paid or payable,
2. The amounts carried tot any reserves, [other
than a reserve specified under section- 33AC]
3. The amount set aside to provision for losses
of subsidiary companies
4. The amount of dividends paid or proposed
5. The amount of expenditure relatable to any
income to which section 10, other than
section 10 (23G) of section 10 A or section
10B or section 11 or section 12 apply
6. The amount of depreciation (this provision
was inserted by Finance Act,2006)
Procedure for computation of MAT u/s 115JB: –
The provisions of section 115JB provide for working
out the income-tax payable as MAT on a deeming
basis. The MAT tax liability under section 115JB can
be worked out by undergoing the following steps:-
1. Compute the total income of the company
(ignoring the provisions of u/s 115JB)
2. Compute the income-tax payable on total
income is worked out under (I) above
3. Work out the book profit under the provisions
of section 115JB
4. Calculate 10% of book profit (as per provision
of section 115 JB)
5. MAT tax liability as worked out under (iv)
above would be the tax payable if it is more
than the amount of tax worked out (ii) above.

The provisions of this section shall not apply to the
income accrued or arising from 01/04/2005 to
31/03/2012, from any business carried on, or
services rendered, by an entrepreneur or a developer,
in a unit or special economic zone, as the case may
be. It is applicable to all companies except those
engaged in infrastructure and power sectors. Income
arising from free trade zones, charitable activities,
investments by venture capital companies is also
excluded from the purview of MAT. However, foreign
companies with income sources in India are liable
under MAT.
The way in which DTC approaches the problem in this
respect, one thing is clear that MAT has become a
part of life and all of us will have to live with it. There
is no point in living in imaginary world and expecting
its removal. At the most, there may be some change
in the methodology, to which some expectations may
be provided. In any case every one will have to sit
down and draw new business plan redesign the trade
practices and shed the flab. In light of the nature of
MAT proposed and the determination of the
government of India to modify the same, the only
option companies are left with is increasing its
taxable income. This can be accomplished by either
increasing the rates or prices of goods and services,
by reducing wasteful expenditure i.e. expenses which
do not add much value to the product or services, or
rather by increasing production with the same assets
or resources.
As can be easily seen, capital intensive companies
like steel & construction etc. have long been chronic
victims of MAT and have lobbied for its removal ever
since its inception. A lot of them are yet to encounter
a period that where they haven’t had to pay MAT. And
considering the MAT credit can be carried forward
only for a period of ten assessment years at a time, it
has led to capital erosion on account of MAT. It is
another instance of short- sightedness on the part of
the government; and one among many measures
which cripple our global competitiveness for short-
term revenue collection.