The Hindu Business Line : MAT should go

The avowed object of the Direct Taxes Code (DTC) is to avoid complexity in tax law. Any complex tax legislation, says the Discussion Paper, increases the cost of compliance as well as administration. It claims to use simple language and tries to reduce the scope for litigation.

MAT variant

Yet, even while reducing the corporate tax rate to 25 per cent, the Code brings in a novel concept of gross assets tax (GAT). This is in lieu of Minimum Alternative Tax (MAT). Several countries have adopted minimum taxes based on a fixed percentage of the assets of a business.

Economic rationale for the assets tax is that investors can expect ex-ante to earn a specified average rate of return on their assets. It therefore provides an incentive for efficiency. The Code provides for MAT calculated with reference to the value of the gross assets.

The shift in the MAT base from book profits to gross assets, it is claimed, will encourage optimal utilisation of assets and, thereby, increase efficiency. Computation of the value of gross assets is indicated in the Second Schedule. For a banking company, the rate of tax is 0.25 per cent and for other companies 2 per cent of the value of the gross assets.

This provision is controversial. The Code claims to have eliminated a number of exemptions which lead to effective tax rates being lower. There is an inherent contradiction in the logic behind GAT.

Wealth tax on companies has been removed. Why should there be incentive for avoiding or paying a lower rate of tax in the new scenario? The Discussion Paper is correct in pointing out that asset-based tax is prevalent in many Latin American countries. Bolivia, Argentina, Columbia, Costa Rica, Ecuador, Panama, Peru and Uruguay have all levied asset-based tax. But the US has stuck to profit-based tax. There are many countries which do not levy either MAT or GAT. Does the present fiscal scene warrant an experimental measure like GAT?

The concept of MAT has been in operation in different forms since 1987 It owes its origin to the Jha Committee report on Economic and Administrative reforms.

Every Budget has been emphasising how revenue is lost because of incentive benefits. The Code has eliminated many of the incentives.

MAT was levied because prosperous companies were declaring large dividends and showing losses for income-tax purposes.

The Dividend Distribution Tax (DDT) was brought in to tackle this problem. Recently, the DDT rate was enhanced from 10 per cent to 15 per cent. Raja Chelliah was against the concept of MAT.

The Expert Group had this to say: “MAT has been brought about with a view to levy some tax on companies which distribute dividend but do not pay any tax. Primarily, such a situation arises because of the systems of reporting income under the Companies Act and under the Income Tax Act. The Group addresses this problem from another angle:

“Maximum depreciation rates will be restricted to 50 per cent as against 100 per cent presently available in the case of several assets. Under the proposed scheme of taxing dividends, it is proposed to levy 10 per cent additional tax on the amount of dividends distributed in excess of the assessable total income. In view of the above, it is proposed to delete Section 115JA.”

The Kelkar Task Force pointed out that in spite of the provisions of MAT (which, by itself is a sour point with trade and industry), the effective tax rate was around 21.9 per cent in 2000-01 as against the statutory rate of 39.55 per cent.

Depreciation allowance

The Task Force suggested redesigning the corporate profits tax so as to align taxable income and the book profit. It gave two alternative options for reform of corporate income-tax. It is significant that in both the options, MAT was suggested for elimination. Depreciation allowance is the main culprit. The allowance should be restricted to the allowance charged to the profit and loss account in accordance with the provisions of the Companies Act.

Section 98 of the Code makes it obligatory for companies to prepare the balance sheet in accordance with the provisions of Part 1 of Schedule VI of the Companies Act, 1956.

Requirements under Sections 210 and 594 of the Companies Act are now made part of Section 98 of the DTC. There is no reason for laying down various rates of depreciation in the Fifteenth Schedule instead of harmonising the rates with those prescribed under the company law.

The Finance Minister has been bold in discarding bad taxes such as FBT and STT. Likewise, MAT/GAT should also be discarded.

(The author is a former Chief Commissioner of Income-Tax.)