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Why MAT Was Imposed?
Whether a direct tax or indirect tax, tax payment is never a pleasure for the tax payers as by virtue of taxes, government takes away some portion of their income. What add to their woes is the cumbersome tax laws which a common taxpayer could never understand. However, there are some private companies who manipulated these tax laws in such a way that they pay zero tax despite showing huge profits in their books and paying dividends to their shareholders. In order to collect tax from such companies, Minimum Alternate Tax (MAT) was introduced in 1997.
The tax laws in India provide several exemptions and deductions to the companies and individuals from their gross total income. Further, depreciation allowable under the Income-Tax Act, is not the same as required under the Companies Act. By virtue of these exemptions, deductions and other incentives, companies even after having high profit were showing nil or negligible taxable income. By introducing MAT on such companies, now every company showing a threshold of book profits have to pay tax in the form of MAT.
What Is MAT?
As per section 115 JA of the Income Tax Act, if a company's taxable income is less than a certain percentage of the booked profits, then by default, that much of the book profits will be considered as taxable income and tax has to be paid on that. The current applicable rate of MAT is 18.5 percent, which was 7.5 percent in 2001-02. The government collects about Rs 37,000 crore as MAT annually.
Often it happens that companies who genuinely deserve tax relief had to pay MAT because of its presumptive nature. In order to giver relief to such companies, system of MAT credit entitlement was introduced. Under this system, if a company pays Minimum Alternate Tax, then the difference between the tax that would have been payable if there was no MAT and the actual tax paid under MAT regime can be carried forward as a credit and can be set off against any tax in the future that is not under the MAT regime.
Companies Falling Under The Purview Of MAT
Except the companies of infrastructure and power sector, all other companies falls underthe ambit of MAT. Company income arising from the operations in free trade zones, charitable activities, investments by venture capital companies are also excluded from the purview of MAT. Also, MAT is not applicable to the other assesses like individual, Hindu Undivided Family (HUF), Partnership Firm and limited liability partnerships (LLP).
Recently, many FIIs knocked the doors of the court saying that MAT is not applicable to them. In April 2015, several FIIs were served tax notices asking them to pay MAT which traditionally was not applied to the foreign funds. While the FIIs contend that it is not applicable to them, Finance Minister in Parliament clarified that MAT exemptions will apply to FIIs income if the normal tax rate would be below 18.5 percent.
Relevance Of MAT In Coming Years
In the latest budget, Finance Minister, Arun Jaitely announced a gradual reduction in the corporate tax rate to 25 percent from the current 30 percent over four years starting 2017. Along with reducing thee taxes, he also said that it will come with removal of tax exemptions. Tax incentives practically bring down the corporate tax rate, and the average effective rate is around 23 percent, while many large corporate reduce the effective rate to much lower levels. This is the reason why the government levies MAT on the book profits of companies at 18.5 percent.
Thus, as suggested, if government goes ahead with reforming the tax system and do away with the numerous exemptions and deductions while reducing the general tax rates, the MAT will lose its relevance. As government is committed to simplified tax regime and reduction of corporate tax by five percentage points by the year 2022, it is highly likely that government may remove MAT in next decade which has become an eyesore of private companies.
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