CHAPTER I - MINIMUM ALTERNATE TAX - GROSS ASSETS VIS-À-VIS BOOK PROFIT - Revised Discussion Paper – Direct Tax Code (DTC)
1. Chapter XIII of theDiscussion Paper on the DTC deals with Minimum Alternate Tax (MAT). As stated in the Discussion Paper, a company would ordinarily be liable to tax in respect of its total income. However, owing to tax incentives, the liability on total income, in many cases, has been found to be extremely low or even zero. Internationally, a variety of economic bases and methods are used to calculate presumptive income so as to overcome the problem of excessive tax incentives. These presumptions could be based on net wealth, value of assets used in business or gross receipts of the enterprise.

1.1 The DTC has proposed a Minimum Alternate Tax (MAT) on companies calculated with reference to the "value of gross assets". The economic rationale for the assets tax is that investors can expect ex-ante to earn a specified average rate of return on their assets, hence it provides an incentive for efficiency.

1.2 It has been proposed in the DTC that the "value of gross assets" will be the aggregate of the value of gross block of fixed assets of the company, the value of capital works in progress of the company, the book value of all other assets of the company, as on the last day of the relevant financial year, as reduced by the accumulated depreciation on the value of the gross block of the fixed assets and the debit balance of the profit and loss account if included in the book value of other assets. The rate of MAT will be 0.25 per cent of the value of gross assets in the case of banking companies and 2 per cent of the value of gross assets in the case of all other companies. The MAT will be a final tax. Hence, it will not be allowed to be carried forward for claiming tax credit in subsequent years.

2. The following major issues have been raised regarding the proposed MAT on gross assets :

i) Computation of MAT with reference to gross value of assets will require all companies to pay tax even if they are loss making companies or operating in a cyclical downturn. An asset based MAT does not have a proximate linkage with a particular year‟s income or turnover. An asset based MAT on loss making companies would result in significant hardship since they would not have the resources to pay the tax. While one „incentive for efficiency‟ argument could be that such companies could shut down or restructure their businesses, such an argument would not be valid for businesses where losses may be inherent over long periods of the business cycle. Income tax should be on real income and any method for presuming income should also be reasonable enough to come closer to the real income.

(ii) The return on assets is one of the indicators for evaluating the performance of companies. However, it is not reasonable to apply this for newly set up infrastructure companies which have long gestation periods. Since the proposed MAT regime does not provide any exemption for gestation period, investment costs in new businesses will be higher on account of the MAT when compared to old businesses which already have a depreciated asset base. Similarly, for companies undergoing major expansion resulting in the value of assets being much higher, the MAT may be much greater than the income tax liability.

(iii) In the case of corporates under liquidation, a levy of a presumptive asset tax till the time the company is dissolved is not reasonable.

(iv) Assuming the same net income as a percentage of gross assets for all taxpayers is not practical as this would vary depending on the industry concerned, the degree of integration of the particular enterprise, and the type of product or service provided.

(v) The inclusion of „capital works in progress„ which is not used in the business and does not contribute in revenue generation would distort the asset based tax. Taxation should be based on net worth and not on gross assets.

(vi) The asset based MAT does not cover situations where there are multiple tiers of subsidiaries for handling separate businesses or investments. There would be a cascading effect of the asset based MAT in such cases.

(vii) The proposed MAT does not allow for any carry forward which would result in a corporate paying more overall tax in a low profit year without there being any relief against above average profits earned in a subsequent year.

(viii) The DTC proposes „investment linked‟ incentives to specified sectors for investment. The application of asset based MAT on companies operating in such sectors contradicts this policy.

3. Some of the issues raised by stakeholders (such as MAT credit) can be addressed by making appropriate changes in the proposed scheme of the asset based MAT. However, there may be practical difficulties and unintended consequences, particularly in the case of loss making companies and companies having a long gestation period. It is, therefore, proposed to compute MAT with reference to book profit.