Minimum Alternate Tax (MAT) – What the Budget did and what it left out…

Minimum Alternate Tax (MAT) was introduced by Mr. P Chidambaram almost 2 decades ago to impute taxes based on book profits. Effectively, MAT was never an additional impost on companies. It only prevented companies from postponing their entire tax liability. When MAT was first introduced it was fixed at 7.5% of book profits. Over the last two decades; with MAT hikes and surcharge, the effective MAT has gone up to 18.5%. The Union Budget has issued some clarifications pertaining to MAT, although many critical areas were left untouched.

MAT on Foreign Portfolio Investors and AOPs:

In the run up to the Union Budget many foreign portfolio investors (FPIs) had received notices from the Income Tax department demanding MAT on their book profits. The issue arose because foreign companies pay MAT on their book profits in India. This Union Budget has clarified that there will be no MAT charged to FPIs on capital gains from equities. This is, of course, to the extent the transactions were executed on the exchange and STT was paid on the same. Debt is left out of the purview of this definition, which means that MAT will be applicable on the interest that these FPIs earn on their debt investments in India.

There was also an anomaly pertaining to the MAT payable by a company on its share of income in an Association of Persons (AOP). This was required even though no tax was eventually payable on these profits. The Union Budget has clarified that the company’s share of income from an AOP will be excluded from book profits while calculating MAT. This is of course subject to the income from AOP being free from tax. This sets to rest a major anomaly in the MAT provisions.

The rate of MAT is still high:

But the real issue of high MAT rates has still not been addressed. As we have mentioned earlier, the rate of MAT has gradually increased from 7.5% in 1996 to 18.5% currently. With the Union Budget proposing to reduce corporate tax rates from 30% to 25%, the level of MAT will come perilously close to the actual tax rate. This makes the entire concept of MAT meaningless. This budget has surely disappointed by not cutting the rate of MAT. The second area of anomaly was the MAT on SEZ (Special Economic Zones) that was introduced in the fiscal 2011-12. There had been continuous calls to abolish MAT on SEZ but the government has not reacted to that demand.

Our take is that MAT was necessitated 20 years ago due to the huge dichotomy between book profits and actual tax paid by Indian corporate sector. The Union Budget 2015 has made 2 announcements that may eventually make MAT redundant. The reduction of tax rates to 25% may actually reduce the incentive to try and postpone tax payments. Secondly, the government proposes to abolish all corporate tax exemptions altogether over the next 4 years. Once that is done, then MAT may no longer be relevant as the exemptions to claim deductions may no longer exist. It looks like companies will have to put up with MAT till that time.

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