With the government deciding to phase out exemptions and reduce the corporate tax rate from 30 per cent to 25 per cent by 2018/19, there have been calls for simultaneous removal of minimum alternate tax (MAT), levied on book profits of companies whose tax liabilities as per the income tax laws are either zero or very low. Among those that have made such a demand are the Confederation of Indian Industry and Assocham.
However, the odds of this happening are low. Many experts say MAT is levied not because of exemptions but because of the different approach under the Income Tax Act to calculate the income of companies. Those in favour of removal say that with the phasing out of exemptions, the income (as calculated under the Income Tax Act) of companies will anyway go up, making MAT irrelevant. "With reduction in tax rates and removal of exemptions, the average tax rate would go up, reducing the need for high MAT rates," says Mohandas Pai, Chairman, Manipal Global Education, and a member of the Kelkar Committee on tax reforms.
Rohan Shah, Managing Partner, Economic Law Practice, says the government should remove MAT and move to a unitary and simple tax system so that there is less litigation.
Those who believe MAT is there to stay seem to have a stronger case. The need for MAT arose not because of exemptions but because of the different accounting approaches under the Income Tax Act and the Companies Act. Due to this, some companies end up paying no tax or less tax even if they have healthy profits on their books (calculated as per the companies law). MAT was brought in to remove this anomaly.
"Exemptions are not the only reason for MAT. If you see the Income Tax Act sections, there are prescribed adjustments, and those adjustments are not only exemption-driven," says Anil Kumar Chopra, Head, Direct Tax Committee, PHD Chambers of Commerce and Industry.
Besides, the benefits of corporate tax exemptions are not uniform and some sectors gain more than others, which is why effective tax rates vary across companies and sectors.
Arijit Chakravarty, Senior Principal, Advaita Legal, says while corporate tax exemptions are not universal, MAT applies to all companies. "Many companies not getting exemptions may still be paying MAT. Therefore, it may not be entirely true that with exemptions gone, MAT will become irrelevant," he says.
The government also has to assess if it can make good the loss of revenue due to MAT removal. In 2014/15, it had collected Rs 36,000 crore through MAT. The net revenue loss (after adjusting for MAT collections) due to corporate tax exemptions during the year was Rs 62,400 crore. Besides, it is unlikely that all exemptions will go, says Chopra of PHD Chambers. "They will be rationalised because there are priorities on which countries focus. Those priorities will be incentivised," he says.
All one can hope for is either removal of MAT on companies in special economic zones or reduction in the MAT rate from 18.5 per cent to 10-15 per cent.