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Of Minimal Utility

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MAT was first introduced by the Finance Act, 1987. The Legislative intent behind introduction of MAT was to make the tax system more progressive and brought highly profitable zero tax companies within the tax domain. To illustrate: companies engaged in infrastructure development are entitled to significant deductions under the IT Act, which are otherwise not taken into consideration for computing book profits, so they pay the MAT. Similarly, a company, which has purchased certain highly tax depreciable assets, may land up paying MAT in the initial years, if the depreciation on those assets as per books of account is prescribed at a much lower rate.

What MAT essentially does is take away part of the specific tax sops granted to companies in certain sectors. To an extent, it neutralises the tax concessions available to such firms.

India has been a strong advocate of progressive taxation for a long period of time; but with the economy growing at close to 9 per cent and several tax exemptions and deductions being phased out, are there any large enough zero-tax companies left to justify the MAT? Remember, companies who pay MAT are anyway entitled to get credit for the same in seven subsequent years against tax payable under normal provisions. Under these circumstances, the MAT is not a long term, additional or significant revenue generating mechanism for the exchequer.

Out of total direct tax collections of Rs 2.29 lakh crore for FY 2006-07, MAT collections were about Rs 8,000 crore, or less than 4 per cent of total direct tax collections and less than 6 per cent of corporate tax revenue. Similarly, for FY 2005-06, of total direct tax collections of Rs 1.65 lakh crore, MAT accounted for about Rs 4,000 crore: less than 3 per cent of total direct tax collections and around 4 per cent of corporate tax revenue.

Even globally, there is a movement or shift from progressive taxation to a flat tax. Russia, Hong Kong and Romania already have stable flat tax regimes. In addition, some other countries such as Mauritius, the Czech Republic, Hungary, Poland and Greece are actively considering a flat tax system.

But in the Indian context, the MAT rate was increased from 7.5 per cent to 10 per cent in the Finance Act, 2006. Much to the surprise of capital markets, the scope of MAT was enhanced further in the Finance Act, 2007 to include long term capital gains income on sale of listed securities in computing book profits for MAT purposes. Apparently, the finance ministry still considers MAT as an important part of its progressive tax policy.

Conditions have changed, though. Over the past few years, we have seen a spate of new young entrepreneurs starting their own ventures across industries. MAT could be a serious discouragement to such start-ups in their gestation period: should MAT be phased out then?

Looking at things from this perspective, one gets the impression that the shortcomings in MAT have now started to outweigh its benefits. Clearly, India has come a long way since the MAT law was introduced; perhaps the finance ministry will adopt a holistic view of these provisions in the forthcoming Union Budget. Perhaps it is the right time to infuse some simplicity in the Indian tax system, and some clarity. By all accounts, the MAT has outlived its utility. Give the law its quietus.

The author is the Executive Director, Tax and Regulatory Services at PricewaterhouseCoopers
Businessworld Issue 25 Feb-3 Mar 2008

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