Budget suggestions: MAT -section 115JB Should be abolished:

[C.A. DEV KUMAR KOTHARI]

Now the process of drafting of the Finance Bill, 2011 must be in progress in the Finance Ministry. Suggestions are being sought from the trade, industry and institutions. In view of changed tax laws it is desirable that the provision of MAT by way of tax on companies with reference to book profit should be omitted, because major reasons for levy of MAT no longer exist. According to the author, the most of reasons for the so called minimum alternate tax have eroded and disappeared and therefore there is no logic in its continuance.  He therefore suggests withdrawal of the MAT under section 115JB.  

1. Different forms of (Minimum Alternate Tax) MAT

To impose at least  some tax called 'minimum alternate tax'(MAT) on companies several  provisions have been tried from time to time like:

1. Section 80VVA imposed  restrictions on some deductions  during lst April, 1984-31^st March, 1988.
2. MAT on 30 per cent of book profits of company assesses was imposed vide section 115J during lst April, 1988 - 31^st March, 1991.
3. There was no MAT during 01.04.1991- 31.03.1997.
4. MAT 30 per cent of book profits of company was imposed vide section 115JA during lst April, 1997 - 31^st March, 2001.
5. MAT by way of levy of minimum tax at rates ranging from 7.5 - 18 per cent of book profits vide section 115JB 01.04.2001( from Assessment Year 2001-02 it is continuing with)

2. The object of MAT

The sole object of MAT has always been to levy a minimum tax on profitable companies because they  disclose substantial profits in the profit and loss account and also substantial dividends but pay no tax on total income as per other provisions of Income-tax Act. 

As per declared objects twin conditions of substantial book profit and substantial dividend should exist,  however, as per provisions and also  in practice MAT is levied by the Assessing Officers irrespective of rate of dividend declared and even when no dividend is declared. Though there are some cases decided by Tribunal in which it has been held that MAT is not leviable on a company which has just turnaround or which  have not declared dividend. 

3. Logic and reasons for MAT have been substantially diluted: 

Major incentives which reduce taxable income have been withdrawn or diluted during last 20 years. Some of them are discussed below:

1. Extra shift allowance (ESA) was discontinued with from AY 1988-89.
2. Initial depreciation on new plant and machinery was Discontinued with effect from lst April, 1985. However, it was again introduced to provide incentive.
3. Initial depreciation on new buildings was discontinued  from assessment year 1988-89.
4. Investment allowance on new plant and machinery was discontinued from assessment year 1987-88.
5. Unallowed depreciation was carried forward from year to year until it was fully availed against any chargeable income and there was no time limit.  However, with effect from lst April, 1997 limit of eight years was imposed. However, later on from AY 2001-02 again old scheme was introduced.
6. Development rebate was discontinued long ago.
7. Higher rate of depreciation prevailed during assessment years 1088-89 to 1991-92 but reduced with effect from lst April, 1992.
8. Most of exports benefits which were available when MAT was introduced have been phased out.

New benefits should be fully exempted and not taxed by levy of MAT: 

Tax benefits which have been introduced after introduction of MAT should be fully exempted and should not be considered for levy of MAT. Otherwise the purpose of allowing incentive is mostly defeated. For example, LTCG with security transaction tax was exempted after introduction of MAT, therefore, such LTCG should not be included in book profit. 

Difference due to depreciation: 

Major reason of difference between book profit and total income as per IT Act is difference in amount of depreciation. This has also lost significance due to lower rate of depreciation now being allowed and higher depreciation required in accounts due to fast obsolescence. 

Difference due to past losses:

Other major reason for difference in book profit and taxable income is past losses. At present past business loss is allowed to be carried forward only for eight subsequent years.  Particularly in case of new projects which do not breakeven in past and suffered loss  past losses need to be set off and this is reason of difference. In such cases dividend is not regularly paid or not paid at all for considerable time. 

Therefore, until and unless past loss and depreciation is fully set off provisions of MAT should not be applied or past assessed losses should be fully set off against book profit; otherwise it would be very difficult to recover past losses because as per a study of large sample of companies it takes about 8-12 years to a new industrial project to be profitable and that too if the project is successful. 
 

Dividend paying company is no longer non tax paying company:

Now the companies are also required to pay tax on profit distributed by them by way of dividend. The tax imposed is additional tax on income. The tax rate is now 15% of dividend distributed. Dividend and tax thereon are not allowed as an expenditure.   Therefore, the company has to pay tax on the amount of income (including dividend and tax thereon) and then  on the amount of profit distributed by way of dividend, thus there is double taxation.  

Fooling around taxpayer public:

As discussed in earlier paragraph if we add up the rate on income before distribution of dividend and tax on dividend we find tax payment  will be more than the rate of marginal rate of tax. Therefore, taxing companies and exempting shareholders from tax on dividend is nothing but a financial camouflage by which the public is fooled around. Besides the taxpayers are also denied benefit of deduction of expenses by saying that dividend is tax free in their hands.   

In fact prior to insertion of section 115-0, a major part of dividend distributed was not taxable because of basic exemption and deduction under section 80L in case of individuals HUF, BOI etc., non-taxability of dividend received by the Government and mutual funds, deduction under section 80M in case of companies, and also because of facility to set off dividend income against interest and other expenses, business loss depreciation on assets, etc.  However when dividend is taxed in hands of company and exempted in hands of shareholders irrespective of fact whether the shareholder has any taxable income or not tax is being levied. 

Exempted income should not be part of book profit: 

When an income is exempted under Chapter IIIA, it is considered not an income for the purpose of tax by way of tax on income. There is definite purpose for allowing such exemption. Therefore, there is no reason for levying tax on such income by way of MAT. We find many of incomes which enjoy exemption under Chapter VIA are included in book profit for MAT. There is no logic for such taxation.  
 

Omission of section 115JB is desirable:

In view of the above, it is clear that the major reasons of MAT no longer exist because of withdrawal of most of special incentives and increased rate of tax on distributed profits.  Therefore, it is requested to the Union Finance Minister to discontinue  the levy of MAT.