The Hindu Business Line : MAT amendments

The tagline of a famous consulting company reads “Go on. Be a Tiger”. An apt sentiment that was echoed in the inner walls of several corporate houses, days before Union Budget 2009. The Finance Minister had an opportunity to roar like the magnificent beast by fast tracking the revival of the Indian economy through progressive tax reforms that would have catapulted growth in the services sector such as technology and “thrust” sector such as infrastru cture.

Increased expenditure allocation for the infrastructure sector has broadened the smiles of several corporate houses in the thrust sector. However, the increase in the basic Minimum Alternate Tax (MAT) rate from 10 per cent to 15 per cent (ETR for Indian companies at 16.995 per cent) on book profits has come as a rude shock.

Introduced in 1996

MAT was introduced in India in 1996 to bring “zero-tax companies” (that had an arbitrage as a result of higher rates of IT depreciation) to the tax bracket.

The infrastructure sector, including power, was initially kept outside the ambit of MAT. Initially at an ETR of 12 per cent, MAT was reduced to 7.5 per cent in 2001 with no MAT exemption being granted to the infrastructure sector. MAT has only gone northwards since then — 10 per cent (ETR 11.22 per cent) in 2006-07 to 15 per cent (ETR 16.995 per cent) in the current budget, thereby impacting the ability of companies to reinvest profits.

The extension of MAT credit claim period from seven to 10 years is a welcome move, especially for the technology sector, in light of the impending expiry of tax holidays. However, most infrastructural players operate under a Build Own Operate and Transfer (BOOT) model, where the entire revenues for the project are typically realised during the tax-holiday period.

Accordingly, the increase in the time period would not have any impact for a typical infrastructure company claiming tax holiday.

Book profit

Budget 2009 has also amended provisions relating to computation of book profits. Accordingly, “the amount set aside as provision in the value of any asset” would now need to be added back.

The same is applicable retrospectively (w.e.f. tax year 2000-01). The amendment is regressive in nature and would be unjust to assessees who have been agitating the issue of provision for bad and doubtful debts at various appellate forums.

Courts have consistently upheld the view that provision for bad and doubtful debts need not be added back as the same represents a reduction in the value of a receivable and not an unascertained liability.

Apex court ruling

During 2008, the Supreme Court, in the HCL Comnet case, had made a distinction between “a debt payable” and “a debt receivable” and held that PBD represents a probable diminution in the value of an asset and, therefore, no add back is required.

The Finance Bill 2009 has effected an amendment to the section to unsettle the apex court’s ruling. In addition, it is pertinent to highlight that the scope has been extended to cover the diminution in the value of any asset and not necessarily only provision for bad and doubtful debts.

The above amendment, especially its retrospective applicability could have serious ramifications. While, the revenue authorities would have sufficient ammunition to argue their case in circumstances where a further appeal has been preferred, what remains to be seen is whether the authorities can, in the absence of an enabling legal provision, suo motu carry out rectification proceedings, especially in cases where the matter has been ruled in favour of the assessee. The coming days would also see initiation of reassessments and revisionary proceedings by the revenue authorities.

Interesting facets

Two more interesting facets to this amendment are worth mentioning. One, whether companies would be tempted to revise their financial statements, by reducing the revenues of the prior years and, two, whether companies would have sufficient profits to effect a write-back of the provisions in the current year.

In case of a write-back, a tax arbitrage (subject to a cost-benefit analysis on interest costs) can be achieved given the higher rate of MAT from tax year 2009-10 onwards.

To rationalise the tax system with the intended economic objective, before the Budget is passed by Parliament, the Finance Minister must consider re-introducing the MAT exemption to thrust sectors such as infrastructure. Further, he should also consider deleting the provision relating to add back of diminution in the value of the asset in arriving at the book profits, if not amending it to a prospective application.

(The author is a senior tax professional with Ernst & Young, India)