R. Anand
The Direct Taxes Code (DTC) is slowly being put to deeper scrutiny. As is always the case, some of the changes may be ushered in with good intention, but inept drafting leaves the door open for needless litigation.
The newly crafted Minimum Alternate Tax (MAT) is a case in point. Ever since Rajiv Gandhi unleashed the book profits tax on India Inc. in 1987, it has generated controversies galore and kept all the courts busy interpreting the intention and scope of the provision.
At present, MAT is applicable to corporates at 15 per cent on published profits. The nominal tax rate for the corporate sector is 33.99 per cent and the effective rate after all deductions/concessions stands at around 22.22 per cent.
Mat computation
MAT, despite the controversy surrounding its existence, has lived by the year for now 22 years and promises to open a new chapter from April 1, 2011.
The mechanics, as per the DTC, is simple. MAT will now be 2 per cent of the value of gross assets as against 15 per cent on profits. For this purpose the value of gross assets would be computed as shown in the Table.
It may be noted that even business assets such as sundry debtors, loans and advances will now form part of the computation of gross assets for the purpose of the levy.
Further, while in the vertical form of the balance sheet the current assets are disclosed net of current liabilities, the proposed MAT computation mechanism does not envisage a reduction of current liabilities from current assets. This also leads to an anomalous situation where a company has to pay MAT on the amount of deferred tax asset, if it appears in the balance sheet of a company. The rate of MAT is proposed to be 0.25 per cent in the case of banking companies and 2 per cent in the case of all other companies, including foreign companies.
This is clearly a hardship for Non-Banking Financial Companies (NBFCs) where 70-75 per cent of the assets in the balance-sheet constitute loans and advances, stock on hire and business receivables. There does not appear to be any justification in levying 2 per cent MAT on business assets, which in any case yield income on monthly basis liable to corporate tax at 33.99 per cent (proposed to be reduced to 25 per cent by the DTC). In the case of several large NBFCs, 2 per cent MAT on gross assets would be far greater than 25 per cent on taxable income.
To make matters worse, MAT will now represent a final tax and will not be allowed to be carried forward for claiming tax credit in subsequent years. Not only this, certain companies, will receive an additional blow — for example, those in gestation period; having negative net worth because of huge accumulated losses; having book losses in the current year; having low asset-turnover ratio / low net profit ratio; and those earning mainly exempt income.
Change in concept
The justification for re-jigging MAT is that several countries have adopted a tax based on a percentage of assets. The concept of MAT when it first originated in 1987 was completely different from what is proposed in the DTC.
The economic rationale of “assets-based tax” is that it serves as an incentive for efficiency. If that be so then the normal tax itself should serve the purpose.
Any sort of tax that departs from the mainstream route of linkage with income/profits is bound to be litigious. Added to that is the discrimination between banking companies and other companies on the rate of tax. Some serious rethinking is required on the proposed MAT in the DTC.
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