Minimum Alternate Tax: An Analysis

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By Mojahid Khan, School of Law, KIIT University, Odisha.

Minimum-Alternate-Tax

INTRODUCTION

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.

CALCULATION PROCEDURE

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.

A numerical illustration

ABC Ltd. Had its computed total income at ₹ 100 lakhs and its book profit as computed under section 115JB is  ₹ 600 Lakhs. In such an event, the following would be the calculation of MAT tax liability under section 115JB for assessment year 2007-2008 as discussed above:

1.

Total income =  ₹ 100 lakhs

2.

33.66% of total income being tax payable (30%+10% surcharge+2% Educational Cess) =  ₹ 33.66 lakhs

3.

Book Profit =  ₹ 600 lakhs

4.

11.22% of the book profit (10%+10% surcharge +2% E. Cess) =  ₹ 67.32 lakhs

5.

Income tax payable under MAT (since higher than tax on total income at (ii) above) =  ₹ 67.32 lakhs

 Hence tax payable by ABC Ltd. For assessment year 2007- 08 would be ₹ 67.32 lakhs since the tax payable on book profit under section 115JB is higher than the tax payable on computed total income.

 COMPANIES IN SPECIAL ECONOMIC ZONE

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.

CONCLUSION & CRITICISM

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.

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