The concept of Minimum Alternate Tax (“MAT”) was introduced in the Indian tax regime to widen the tax net. Often there were situations where companies declared both profits and dividends but were not liable to taxation on account of various incentives and exemptions provided under the income tax legislation. MAT ensured that such companies were liable to pay some tax. As per the existing provisions of the Income tax Act, 1961, certain companies are liable to pay a fixed percentage of book profit as MAT.

The Direct Taxes Code Bill, 2009 (“Code”) unveiled by the Finance Minister on 12 August 2009 relooks at the MAT. It provides for MAT on companies calculated with reference to the “value of gross assets”. The rationale for the shift in the MAT base from book profits to gross assets has been clarified in the Discussion Paper to the Code. The Paper states that the economic rationale for adopting minimum taxes based on the fixed percentage of assets is that investors can expect ex-ante to earn a specified average rate of return on their assets, thereby increasing efficiency.

The Discussion Paper to the Code states that several countries have adopted minimum taxes based on a fixed percentage of the assets of a business.

Salient provisions of MAT under the Code

Rate of tax:- The rate of MAT will be 0.25% of the value of gross assets in the case of banking companies and 2% of the value of gross assets in the case of all other companies.

Applicability :-MAT is applicable to a company if the tax liability as computed under the provisions of the Code is less than 0.25%/ 2%, as the case may be, of the value of gross assets.

Value of gross assets :-The value of gross assets is to be computed with reference to the value of the following as at the close or on the last day of the financial year:

MAt in DTC

Preparation of Balance Sheet for computing gross assets :-For the purpose of computing the gross assets, every company is required to prepare the balance sheet for the relevant financial year in accordance with the provisions of Part I of Schedule VI to the Companies Act, 1956. The company should adopt the same accounting policies, accounting standards and the methods and rates for calculating depreciation as have been adopted for the purpose of preparing accounts laid down by the company at its annual general meeting or filed with the Registrar of Companies.

Every other person not required to prepare the accounts in accordance with the provisions of the Companies Act, 1956 is also required to prepare its balance sheet and profit and loss account as if the provisions of the Companies Act are applicable. The Board may, however, prescribe such rules as may be necessary for the purpose of enabling such persons to prepare the balance sheet and profit and loss account.

Tax credit :-Under the Code, MAT will be a final tax. Hence, the amount of MAT paid which is in excess of normal tax will not be allowed to be carried forward for claiming credit in subsequent years.

Implications of the new MAT based on gross assets

  • MAT will affect loss making companies, capital intensive companies like infrastructure companies and companies with multi-tiered holding structure.
  • The fact that MAT will not be allowed as a credit in subsequent years under the Code will add to the cash outflow of companies.
  • Foreign companies that have income from sources in India may be liable to MAT and consequently may be required to maintain its books of accounts in accordance with the provisions of the Companies Act, 1956 or as per the Rules framed by the Board for the purpose of MAT.
  • MAT being a tax on value of assets can be said to be not in the nature of income tax and hence, foreign companies may not be allowed to claim tax credit under the tax treaty in respect of MAT paid in India.
  • The benefit of carry forward of existing unutilized MAT credits as at 31 March 2011, post the Code coming into effect, is not provided for.

The proposed levy of MAT based on value of gross assets may impact investments and capital formation and hence the existing provisions may be reviewed to address the aforesaid implications.

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  1. Shyamal Kanti Sur says:

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