Union Budget 2018: Expect a Surgical Tweak in Minimum Alternate Tax (MAT)

By IndraStra Global News Team

By IndraStra Global News Team

According to an information brochure, the Union Ministry of Finance has considerably included Minimum Alternate Tax (MAT) as part of it glossary list for Union Budget 2018, which is scheduled to be presented in the Parliament on February 1. As per the market speculations by the leading industry experts, the ministry may tweak the provisions on MAT in the forthcoming budget to help the industry overcome the impact of tax reforms in the U.S. Currently, MAT is levied at the rate of 18.5% of the book profits.

The purpose behind the introduction of MAT in the Income Tax Act was to bring all zero tax companies and to neutralise the impact of certain benefits/incentives. The MAT is a minimum tax that a company must pay, even if it is under zero tax limits. It is applicable to all companies except those engaged in power and infrastructure sectors. As of now, income arising from free trade zones (FTZs), charitable activities, investments by venture capital companies are also excluded from the purview of MAT. However, foreign companies with income sources in India are liable under MAT.

The Reasoning behind MAT

In the past, a large number of companies showed book profits on their profit and loss account and at the same time distributed huge dividends. However, these companies didn’t pay any tax to the government as they reported either nil or negative income under provisions of the Income-Tax Act.

"When a company distributes a dividend, it is always computed on the basis of income as per companies act. Hence, tax-profit has no meaning. As per basic common sense, the tax should be deducted before distributing profit to the shareholders. This is obvious because the money must first go to the government before the shareholders take it back." says Palkesh Asawa, a Chartered Accountant. He also adds "In a hypothetical scenario, it is possible that the income as per income tax is lower than the income as per companies law. What will happen in such case? The company will not pay tax, but it can still distribute a dividend. Is this acceptable?"

These companies were showing book profits and declaring dividends to their shareholders but were not paying any tax. These companies are popularly known as "zero tax" companies.

Recent Developments

On January 24, 2018, survey findings were published jointly by the Federation of Indian Chambers of Commerce & Industry (FICCI) and the Indian Banks' Association (IBA).

"The bankers have suggested specific measures that may be announced in the upcoming Union Budget to facilitate credit growth and investment pick-up in the economy. They recommend accelerated investments in infrastructure sector as well as interest subvention for investments in long gestation infrastructure projects," the survey said.

According to it, most of the responding banks have suggested a reduction in corporate tax rate from 30 percent to 25 percent, lowering of MAT rate to 15 percent and enhancing tax deductions and exemptions for individuals.

On January 23, 2018, National Association of Software and Services Companies (NASSCOM) proposed MAT exemption to start-ups under the Startup India Action Plan. Also, NASSCOM added, "While certified startups under Startup India action plan have been exempted, we recommend - DIPP may certify/accredit angel groups based on specified norms and conditions in the same way that has been done for Startups and Investments made by these recognized/accredited angel groups should be exempted from this section. Suitable safeguards may be built-in to enable this."

On January 6, 2018, a press release has been issued by the Central Board of Direct Taxes (CBDT) in a bid to minimize the hardship faced by companies against whom an application for corporate insolvency resolution process has been admitted by the Adjudicating Authority under section 7 or section 9 or section 10 of the Insolvency and Bankruptcy Code, 2016. The amount of total loss brought forward (including unabsorbed depreciation) shall be allowed to be reduced from the book profit for the purposes of levy of MAT under section 115JB of the Income-tax Act, 1961.

The Timeline of MAT

MAT was first introduced in India vide Section 80VVA of the IT Act through the Finance Act of 1983. Section 80VVA placed a restriction on certain deductions in the case of companies, or in other words, placed a ceiling on allowances and required companies to pay a minimum tax on at least 30 percent of their profits.

In the year 1987, Section 80VVA was omitted by the Finance Act, 1987 (from the assessment year 1988-89), which instead introduced section 115J in a modified form. Section 115J, as drafted in 1987, introduced a two-step process. First, the assessing authority had to calculate the income of the company. Second, the book profit had to be determined. If the income of the assessee company was less than 30 percent of its book profit, the total income chargeable to tax would be 30 percent of the book profit.

For the assessment year 1991-92, Section 115J was, again made inoperative from when the finance ministry widened the tax base and attempted a rationalization.

In the year 1996, The MAT provisions were subsequently reintroduced by the Finance Act (No. 2) of 1996, through Section 115JA; and then by the Finance Act of 2000, which replaced Section 115JA with Section 115JB.

In the year 2015, MAT rate has been progressively increased from 7.5 percent (introduced in 2000) to 18.5 percent. In other words, the tax computed by applying 18.5 percent (plus surcharge and cess as applicable) on book profit.