Under the erstwhile Income Tax Act, 1961, MAT was levied u/s. 115 JB on book profits. The idea of levying MAT on book profits was to ensure that the entity pays tax at least on book profits even though the tax payable by it under the Income Tax Act comes to be lower than tax computed on book profits. Hence here the basic underlying concept was that the Company has made book profits based on the accounts prepared under the Companies Act. However in case the tax payable under the Income Tax Act (on account of various deductions permissible under the Income Tax Act, 1961) is lower as compared to the tax paid on book profits, then Company has to pay tax on book profits u/s. 115JB. Further credit was available in respect of such excess tax paid by the Companies. Hence this additional tax paid on account of MAT was in the nature of advance tax paid by the Company.
The discussion paper on New Income Tax code unveiled on 11th August 2009 states that base for the tax code should be comprehensive definition of income. It further states that income for the purpose of this code, will, in general, include all accruals and receipts of revenue and capital nature unless other wise specified.
It seeks to introduce MAT in a very different form. It states that several countries have adopted minimum taxes based on a fixed percentage of the assets of a business. The economic rationale for the tax on assets is that investors can expect ex-ante to earn a specified average rate of return on their assets. Therefore, it provides an incentive for efficiency. Accordingly the code provides for Minimum Alternate Tax calculated @ 2% on “value of the gross assets” for Companies other than Banking Companies. It further states that the shift in the MAT base from book profits to gross assets will encourage optimal utilization of the assets and thereby increase efficiency. Hence a Company has to pay higher of the following as tax:
a) 25 % of the total taxable income or,
b) Minimum alternate tax @ 2% of the value of gross assets (0.25% in case of Banking Companies).
Further it also states that credit of Minimum alternate tax paid by the Companies would not be allowed.
The above provision of taxing Companies by MAT surely has the following lacunas:
a) Income Tax should always be on accrual/receipt of income and should not be charged on such presumptive basis (without any reference to the income earned).
b) By not allowing credit of tax paid by way of minimum alternate tax, this tax is in the nature of wealth tax and not on income at all;
c) This type of tax will clearly be an additional burden to loss making companies and will make their survival more difficult;
d) In case of long gestation projects, this tax type of tax will further increase the cost of projects and might even make the projects unviable.
e) This type of tax will be higher in case of highly leveraged companies and capital intensive companies.
f) This type of presumptive tax will reduce investments in Infrastructure and will dissuade investments.
Hence based on the above, the MAT provisions in its existing form in the New Income Tax code needs serious reconsideration by the Hon’ble Finance Minister.
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