MAT Effect

MAT rate from 10% to 15% will result in higher cash outflow for zero-tax companies. At a time, when most industries are facing credit crunch, imposing higher tax, for which credit may be available in future, seems to be out of sync with the finance ministers claim that this Budget is the first stimulus for the economy. Besides the rate hike, the base for MAT has also been raised. Till now, any decline in the value of assets could be netted off to arrive at the base for calculating MAT. Not any more. Now, any diminution in the value of assets will have to be added back to the book profit, which serves as the base.

Shipping, Sun Pharma, Bharti Airtel, Suzlon Energy and HCL

Technologies may see their tax liabilities go up this year, though the burden could be lower in subsequent years. So would some their IT peers. Finance minister Pranab Mukherjee has proposed a five percentage point hike in the minimum alternate tax (MAT) paid on book profits, taking the effective MAT rate to around 17% from 11%.

Even more disturbing fact is that the amendment is retrospective from April 1998,

The fact that MAT is not a permanent cost, and it is only a timing issue, has not been highlighted well which makes the effect of the revised MAT look more dangerous for the corporate world than it really is.

With the Budget proposal, the effective MAT rate for domestic companies would work out to 16.995%, including the surcharge and education cess. These companies can set off MAT against their future tax liability. To site an example: a company which has a tax liability of 20% this year, and pays a MAT of 17% gets a 3% credit. If the tax liability works out 14% next year, it can use the credit and pay a tax of 11%.