The minimum alternate tax (MAT) has existed in some form or the other in the Income-tax Act, 1961 (the IT Act) for several decades now. First, it was in the form of restricting Section 80 deductions to 70 percent. The result was a company perforce had to pay tax at least on 30 percent of its gross total income
In 1996, the MAT came to be related to book profits — if the total income reported under the IT Act was not even 30 percent of the book profits, then one had to pay a minimum tax on at least 30 percent of book profits. Later it was linked to tax rate — if the tax payable was less than 7.5 percent of the book profits, then at least 7.5 percent had to be coughed up. This has now grown to a monstrous proportion — 18.5 percent is the MAT. The rationale for MAT was if a company could pay the dividend to its shareholders, it might as well pay income tax to the government.
In 2011, the United Progressive Alliance (UPA) government spread the MAT’s tentacles to non-corporate assessees as well in a spirit of defiance. The clamor was for its abolition as it was discriminatory.
What the then government did was to abjure discrimination by making the MAT applicable to all! But next year, it relented and targeted non-corporate assessees for the MAT only if their adjusted income — i.e., income after adding back profit-linked deductions under Section 80-IA to Section 80RRB as well as the amount exempted under Section 10AA (all these are tax incentives relating to select businesses with the thrust being on foreign exchange earnings in many of them) — exceeded Rs 20 lakh. The MAT rate is the same as for companies—18.5 percent which together with surcharge as well as education and health cess works out to 19.24 percent.
MAT is an abomination. It speaks with a forked tongue. The income tax law seeks to encourage and spur certain types of business activities as well as locations which are, by and large, untouched by industrialisation. Having thus given these incentives with one hand, it does not lie in its mouth to wrench them away with the other, which is what MAT is all about.
The MAT had its origin in the phenomenon of zero tax companies—companies that rewarded their shareholders with generous dividend payouts but thumbed their noses at the taxman in the manner of elephants having two sets of teeth, one for eating and one for display. This alleged duplicity was not thanks to the Jekyll and Hyde behavior of the Indian corporate sector but the tax incentives given by the IT Act.
Tax planning is not a crime so long as it does not degenerate into tax evasion. But the government somewhere down the line started perceiving dividend-paying companies that did not pay income tax as quasi-criminals. Its riposte was not only the MAT but also Dividend Distribution Tax (DDT).
Indian companies not only have to pay the MAT wherever their actual tax liability is less than 18.5 percent plus but also the DDT whenever they pay dividend to the shareholders. This is a double whammy though the DDT is in lieu of tax in the hands of shareholders except in case of persons getting the dividend in excess of Rs 10 lakh in whose cases the DDT is in addition to 10 percent tax paid by such recipient shareholders. With the advent of DDT, the government’s fixation with minimum tax should have gone but it hasn’t.
The full Budget to be presented by new Finance Minister Nirmala Sitharaman should abolish the MAT lock, stock and barrel. But if this is not possible except in phases, a beginning should be made with individuals who should not be bothered with complicated procedures and an impost they are not prepared for. Quietus given to the MAT would send the right signals—the government is serious about reviving the economy and ending unemployment. Tax incentives should not be given grudgingly. The MAT is actually more than grudging conferment of benefits—it is a cruel wrenching away of the benefits given by one hand by the other.
(The writer is a senior columnist and tweets @smurlidharan)
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Updated Date: Jun 21, 2019 17:06:51 IST