Large, capital-intensive companies will have to cough up over Rs 11,500 crore as additional tax in 2010-11 if the government enacts the proposed Direct Taxes Code in its present form.
In a big blow for such firms, the draft code says companies will have to pay the higher of a 25 per cent corporation tax and a minimum alternate tax (MAT) of 2 per cent on their gross assets. Second, the basis for computing MAT has changed from book profits (15 per cent of the book profits at present) to gross assets. Third, MAT will have to be paid in even loss-making years, with no set-off against future profits.
Capitaline data shows that there are 267 large companies (with gross assets of over Rs 500 crore) that will have to pay MAT of 2 per cent of their gross assets as that would be higher than the levy of 25 per cent corporation tax. These companies paid Rs 13,897 crore as tax last year. In 2010-11, when the code is expected to come into effect, they will have to pay around Rs 25,400 crore, at the current level of profit and gross assets.
“MAT will be an additional burden, which would make sustainability difficult, especially in recessionary periods,” Akil Hirani, managing partner, Majmudar & Co, a Mumbai-based corporate law firm, said.
Uday Ved, head of tax at KPMG India, said while the service sector companies would not be affected, the new provisions would seriously impact large capital-intensive companies in infrastructure, oil and gas, telecom, pharmaceuticals, real estate etc. What’s worse that companies which would make losses in the initial years would have to pay MAT. The code also takes away the carry-forward and MAT credit facility.
The impact on companies like Reliance Communications would be large. The country’s third largest mobile service provider will have to pay Rs 644 crore tax in 2010-11 at the same level of profit and assets against Rs 12.4 crore it paid last year.
Similarly, the additional tax liability for Infosys Technologies would be Rs 557 crore, for Hindalco (Rs 395 crore), for Bharti (Rs 384 crore) and for Tata Consultancy Services (Rs 329 crore).
“A levy on gross assets artificially tries to infuse productivity which may not be possible,” Hirani said.
The proposal to apply MAT on gross assets instead of book profit has also come under heavy criticism from industry because it is not a tax on income, which direct tax should ideally be, but a tax on capital or assets.
There is a separate provision of capital gains tax if a company makes profit out of assets. But the government has argued in the code that this will help check tax evasion by companies through various deductions. Tax experts said the step would be tough for companies implementing projects with high gestation periods.
“MAT would prove to be regressive for capital-intensive companies,” Mukesh Butani, head, tax practice at BMR & Associates, said. “And there is not going to be escape from MAT for any firm,” he added.
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