The Hindu Business Line : MAT reforms may bring some cheer to infotech sector

Bangalore, Aug. 13 The Central Government’s tax reform proposals announced on Wednesday could bring some cheer to the IT sector in terms of lower tax outgo.

The reform proposes that companies pay Minimum Alternative Tax (MAT) of two per cent on their gross assets. At present, the MAT payout is 15 per cent tax on their book profit. Industry experts said IT is not a capital intensive industry and hence the proposed change in the tax structure is likely to benefit the sector. However, IT firms said it was too early to comment, and more analysis was needed before a conclusion can be reached.

The Budget for this fiscal had raised MAT to 15 per cent of the book profit of a company from the earlier 10 per cent. Companies that enjoy tax incentives have to pay a minimum tax on its book profits. This was designed to reduce the distortionary impact of tax incentives. MAT is more of an advance tax which can be off-set against tax liabilities in the future when the tax holiday ends.

“We will have to see how they define gross asset. For that we will have to see the fine print of the proposal,” said Mr V Balakrishnan, Chief Financial Officer, Infosys Technologies Ltd. “I don’t think it will not make a material difference,” he added.

Mr Harish H.V., Partner, Grant Thornton India, said the Government has worked out the change in such a way that the two tax structures would be comparable. Broadly speaking, the IT companies are not very asset intensive and hence they may actually stand to benefit from the proposed change, he added.

“We are still in the process of analysing it. Before the analysis is complete, it will be difficult to say what the impact would be,” said Mr Rostow Ravanan, Chief Financial Officer, MindTree Ltd.

Capital-intensive

Mr Naveen Aggarwal, Executive Director, KPMG India, said the tax impact will accentuate for capital-intensive or asset-intensive industries such as manufacturing. However, the impact may be lower for the services industry such as software and BPO, as they have relatively smaller asset base.

He said the proposed change in the MAT structure seeks to levy minimum tax on all corporates, whether they are earning profits or not. This will severely hit those companies, which are in deep red as the alternate tax is going to be based on the value of gross assets, Mr Aggarwal said.

For this purpose, gross assets would include the value of gross block of fixed asset, capital work in progress and all other assets and would be reduced by accumulated depreciation and accumulated loss as reflected by way of debit balance in profit and loss account, he said.

For companies paying MAT, this will be a final tax and the inability to carry forward MAT credit worsens the situation vis-À-vis the current regime, he added.

Related Stories:
New Code promises lower direct tax rates
Deciphering the Code