Budget 2015: MAT’s use-by date was over on Day 1, abolish it now

Minimum alternate tax (MAT) or book profit tax has its origins in the phenomenon of zero tax companies which thumbed their noses at the taxman even as they merrily paid dividend to their shareholders. Companies belonging to this genre with its belittling implication of sleight of hand smugly said what they were doing was within the four walls of law – they claimed tax benefits on offer to the hilt. From a soft 7.5 percent, today the MAT stands at 18.5 percent plus surcharge thus effectively making it a 20 percent tax on book profits should the income tax calculated under the provisions of the income tax law fall below this figure. [caption id=“attachment_2048431” align=“alignleft” width=“380”] Tax norms. Reuters[/caption] The bottom for MAT was knocked out when dividend distribution tax (DDT) was introduced in 1996 given the fact that its raison d’être was payment of dividend by zero tax companies. When DDT corrected this skew or oddity, where was the need for continuing with MAT? Besides, the scheme of MAT is immoral as it casts aside the solemn provisions of the income tax law made by Parliament by a peremptory provision that undermines the former. One could have understood had MAT been in the nature of advance tax. To be sure, the excess tax paid thanks to MAT is allowed to be carried forward for a maximum period of subsequent 10 assessment years but the devil is in the details – in the year in which the set off is sought, MAT of 20% must be paid in any case. To wit, a company has paid excess tax thanks to MAT of say Rs 2 crore harking back to the 10th year backwards. In the 10th year following, let us say its book profit is Rs 4 crore whereas taxable profit is Rs 5 crore. Tax at the rate of 34 percent on taxable profits including surcharge and education cess works out to Rs Rs 1.7 crore whereas 20 percent of book profits works out to only Rs 0.80 crore thus not warranting payment of MAT. Strictly speaking the company should not be called upon to pay any tax because it has already paid excess tax of Rs 2 crore but the law in a manner of heads-I-win-tails-you-lose says even in this year tax at the rate of 20 percent of the book profit has to be coughed up in cash. In other words, the company has to pay Rs 0.80 crore in cash despite having the advance tax cover enough to take care of its tax liability of Rs 1.7 crore. The bottom line would be its tax liability of Rs 1.7 crore would be taken care of by set off only to the extent of Rs 0.90 crore. To add insult to the injury, Rs 1.1 crore paid 10 years ago will now lapse because the excess tax paid thanks to MAT can be carried forward for a maximum period of ten years. MAT is an anachronism in this day and age. It started off in a different form though under section 80VVA in 1983 when the deductions under Gross Total Income were restricted to 70 percent thereof, leaving 30 percent for tax. The amount that was not capable of being deducted was allowed to be carried forward without any time limit. The scheme was at least fair though it too spoke with a forked tongue – caviling at tax incentives offered by the law itself! But what then finance minister PChidambaram did way back in 1996 was untenable and sadly his legacy is still continuing – both MAT and DDT hold the field. Chidu had a beef with zero tax companies and went onto swat them with DDT. Having done that he had no business to impose MAT in addition. In other words, MAT started off with a strange use-by-date, expiry date over on the day of introduction itself! One hopes the incumbent Finance Minister Arun Jaitley junks it.