MAT- A PROVISIONAL COLLECTION FOR WHICH NOW THERE IS NO REASON AND JUSTIFICATION –Section 115JB should be abolished

[CA DEV KUMAR KOTHARI]

In view of changed tax laws ( reduced incentives and tax on dividend) it is desirable that the provision of MAT by way of tax on companies with reference to book profit should be omitted, because the reasons for levy of MAT no longer exist. MAT being a provisional collection also deserve to be avoided because tax collection must preferably  be final and not amenable of refund, credit or adjustment. Final tax collection can provide accuracy of tax data, whereas provisional collections create lot of contingencies for future. The MAT may not also not be a valid levy by way of tax on income. Therefore it is advisable to omit levy of MAT.

The object of  MAT

The main object of MAT has always been to levy a minimum tax on highly profitable  companies  because they  disclose substantial book profit  and also  declare  substantial dividends but pay no tax on total income as per other provisions of Income-tax Act.

When MAT was introduced, there was no tax  imposed on dividend distributed by companies. Tax on dividend payable by companies is a final collection of tax and is imposed as an additional income-tax on companies.

Therefore, once tax on dividend is imposed on companies, the company is no longer a no tax paying company.

As per objects twin conditions of substantial book profit and substantial dividend should exist,  however, in practice MAT is levied by the Assessing Officers irrespective of  amount of profits earned, rate of dividend declared and even when no dividend is declared.

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)

Logic  and reasons for MAT have been substantially diluted:

Major incentives  which reduce income have been withdrawn or diluted during last 20 years as illustrated below:

• Extra shift allowance (ESA) was discontinued with from AY 1988-89.
• Initial depreciation on new plant and machinery was Discontinued with effect from lst April, 1985. However, it was again introduced to provide incentive.
• Initial depreciation on new buildings was discontinued from assessment year 1988-89.
• Investment allowance on new plant and machinery was discontinued from assessment year 1987-88.
•  Development rebate – Discontinued long ago.
• Higher rate of depreciation prevailed during assessment years 1988-89 to 1991-92 but  substantially reduced with effect from lst April, 1992.

 Example of reduced rate of depreciation on plant and machinery

During assessment year 1987-88, the following deductions were available:

	On new plant and Machinery	Old plant and machinery
Normal depreciation	15%	15%
Extra shift allowance for triple shift	15%	15%
Investment allowance	25%	-
Initial depreciation	7.5%	-
Total	62.5%	30%

As against this now only normal depreciation will be available @15 per cent.  Furthermore if new plant and machinery was acquired on or after lst October of the year, depreciation @ 7.5 per cent shall be allowed.

Therefore, it is clear that most of the benefits conferred on investments have been reduced substantially.

 Major cause of difference between book profit and total income has lost significance

The most important reason for higher book profit and lower taxable income is low depreciation provided in books and higher depreciation allowable under the Income-tax Act.  However, now-a-days significance of this factor has been reduced considerably for the following reasons:

1. reduced rate of depreciation under the Income-tax Act;
2. higher depreciation required to be provided in books due to increased obsolescence at faster speed because of fast changing technology, and increased competition with advanced technology as a result of opening of economy.

Tax on dividend by companies – All dividends made taxable

From lst June, 1997, the companies are also required to pay tax on profit distributed by them.  Dividend paid and tax thereon, which is covered under section 115-0 is not allowed as an expenditure.   Therefore, the company has to pay tax on the amount of income as well as on the amount of profit distributed by way of dividend, thus there is double taxation.

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.  Hindu undivided family, body of individuals 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 with effect from lst  June, 1997 tax is paid by company irrespective of fact whether the shareholder has any taxable income or not.

MAT creates anomaly in tax scheme:

Various incentives are allowed for a definite purpose. Due to such incentives,  normal tax liability of say around 33% may be reduced to say about 5-7% or in some cases it may come down to nil in some years. If no tax in imposed now, companies will have better capital base and will earn better profit in future and pay tax. Imposition of MAT  is counteractive to incentives. Incentives allowed thus are partly withdrawn by imposing MAT. Therefore, allowing incentives on one hand and imposing MAT on other hand creates anomaly and provisions of incentives lose significance.

Past losses should be fully allowed.

In view of present law past business loss is allowed to be carried forward only for eight subsequent years.  The major reasons for difference in book profit and taxable income of any year generally and particularly in case of new projects is due to set off of past losses.  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  7-10 years to a new industrial project to be profitable.

Un-necessary complications and litigation:

Levy of MAT and credit of MAT have created lot of complications and  litigation. In fact there is an independent determination of computation of book profit and MAT thereon. Then account has to b e maintained for allowable MAT credit. Tax collected today may become refundable or adjustable in future within ten years. This creates uncertainty of future tax collection.  MAT is a provisional collection. There is no useful purpose of first collect and then refund or adjust tax. Tax collection should be final collection. MAT is not a final collection, it should be abolished.

MAT may be ultravirse the Constitution of India:

Validity of MAT as a tax on income is also doubtful. Readers may read articles on this aspect which are available on this website. A provision which is doubtful about its validity, must be avoided to bring in certainty about tax collection.

Withdrawal of section 115JB

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 now  increased rate of tax on distributed profits.  Therefore, it is requested to the Union Finance Minister to withdraw MAT.