When the first draft of the Direct Taxes Code (DTC) was released in August 2009, the provision dealing with Minimum Alternate Tax (MAT) was one of the most discussed and deliberated provision. It proposed to levy tax on the gross value of assets. There were certain drawbacks and limitations which were pointed out to the government, as a result of which, the government decided to reinstate the earlier regime of levying MAT on book profits. However, after reading the proposed MAT provision in conjunction with the entire code, one is left wondering whether it will turn out to be a boon or a bane to taxpayers in India.
The story so far
In 1987-88, as a measure of equity, the government brought MAT on book profits. The memorandum explaining this provision stated that it is an accepted canon of taxation to levy tax on the basis of ability to pay. These provisions continue till date with a brief interregnum during the years 1990-91 to 1995-96. However, these were subject to some key amendments:
* Substantial increase in the effective rate of MAT during the last three years, i.e. 11.33% (2008-09), 16.99% (2009-10) and 19.93% (2010-11);
* Credit of taxes paid under the MAT was allowed to carry forward and set off only after 2005-06; currently it can be carried forward and set off up to ten years, subject to prescribed norms;
* The restrictive list of deductions and some retrospective amendments in disallowances such as inclusion of deferred tax, diminution in value of assets, etc.
Impact analysis: Revised Direct Taxes Code
At first glance, taxpayers may feel relieved to see the re-instatement of MAT on book profits and availability of MAT credit up to fifteen years, unlike the current ten years under the I-T Act. If we consider the reduction in the tax incentives as well as in permissible allowances, there is a possibility of lesser corporate taxpayers being covered by the MAT under DTC. However, on a careful reading, the picture is not entirely rosy. Some of the factors of concern to taxpayers are:
* Corporate tax rate is reduced to 30% from the existing 33.22%, however, the MAT is slightly increased to 20% from the existing 19.93%;
* There is no specific provision for carry forward of MAT credit available under the existing Income tax Act;
* Impact on the book profits under International Financial Reporting Standards (IFRS) may have to be carefully evaluated.
The developers of special economic zones (SEZ) and units operating in SEZs will also be included under the MAT regime which are currently exempt from MAT.
Corporate taxpayers availing these investment-linked incentives and profit-linked incentives (under the grandfathering clause) will be liable to MAT. They may be power, infrastructure, manufacturing companies, hotels, hospitals, etc.
These are some of the clauses which may cause concern to taxpayers. However, some issues also need consideration as they could result into increase in tax liabilities for foreign companies in India:
Issues for foreign firms
As per certain judicial precedents, currently foreign companies having business presence within India may be liable to corporate income tax or MAT, whichever is higher. The corporate income tax for foreign companies in India is 42.23%. Under the DTC, the foreign companies having business presence within India are liable to a corporate tax of 30% and branch profits tax of 15% after reducing the income tax payable on such income. It may appear that now the effective income tax rate of foreign companies will be 40.50%. However, this may not be true when it comes to MAT.
There is a possibility of such foreign companies paying higher taxes under the MAT regime. This is because of the wording of DTC which does not appear to consider branch profits tax as ‘income tax’. ‘Rates of income tax’ has been defined in the First Schedule of DTC and the ‘Rates of other taxes’ has been defined in the Second Schedule of DTC, hence revenue authorities may contend that while computing MAT for the foreign companies, only the taxes payable under the corporate tax have to be considered for comparison and branch profits tax would be separately levied.
Therefore, in cases where the book profits are higher than taxable profits on account of accounting adjustments, income tax deductions, etc. foreign companies may be liable to pay taxes under MAT. In such cases, the total tax liability under DTC may be higher than the liability under the existing Income Act.
Further, there is a risk that foreign companies may be denied the credit of “branch profits tax” in their resident country due to exclusion of the same from the term “income-tax” used in DTC. While this will depend on the tax credit regulations of each country, it may increase the tax cost for foreign companies having business presence within India.
Implications under the MAT will be fact-specific and may vary from company to company. There are certain avenues which could be explored by corporate taxpayers to mitigate the MAT exposure such as use of Limited Liability Partnerships, non-adoption of IFRS, etc. It appears that the government is resorting to extensive use of MAT provisions to achieve the objectives of equity and levying tax on the basis of ability to pay. We hope that the government will consider the possible hardships arising out of this new provision. After all, one should not forget that sometimes the pursuit of equality results in greater discrimination.
Sunil D Shah is a partner and Romesh SA Sankhe is a manager, Deloitte Haskins & Sells. The views expressed are personal.