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The government may retain profit as the key condition for levying minimum alternate tax (MAT) in the final draft of the direct taxes code after its asset-based approach proposed earlier ran into a storm of protests from industry. Other options being considered by the government include tax exemptions for asset-heavy infrastructure companies and start-ups, and a lower rate for MAT, a senior government official told. The proposed direct taxes code, which was unveiled by the government in August and aims to simplify the country’s complex tax laws, suggested gross assets as the basis for levying MAT, which industry argues will penalise asset-heavy companies.

“We have an open mind on the issue of MAT,” the official said, requesting anonymity. MAT is levied on companies that do not pay income tax because of exemptions.

Returning to the old system of levying 15% MAT on a company’s book profit computed under the Companies Act and using net assets as the basis for taxation are among various options being examined by the finance ministry. Industry says the proposed 2% tax on gross assets is too steep as it assumes returns of more than than 8%. Banking companies have to pay 0.25% of their assets as MAT.

An information technology firm would have fewer assets as its primary resource is employees. But an infrastructure company will largely have fixed assets and a gross asset basis of levying MAT could imposing a greater liability on such a firm.

The government has already begun spadework on the final draft of the DTC legislation after taking feedback from the industry and is hopeful of introducing it in the forthcoming winter session of Parliament. The code has argued that levying MAT on gross assets will encourage “optimal utilisation” of assets and increase efficiency. Taxation experts do not agree with this line of argument.

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