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New Income Tax Code: MAT – Tax on Gross Assets- Whether fair and logical?

Started by hiralraja, August 26, 2009, 05:29:18 PM

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Under the erstwhile Income Tax Act, 1961, MAT was levied u/s. 115 JB on book profits. The idea of levying MAT on book profits was to ensure that the entity pays tax at least on book profits even though the tax payable by it under the Income Tax Act comes to be lower than tax computed on book profits.  Hence here the basic underlying concept was that the Company has made book profits based on the accounts prepared under the Companies Act. However in case the tax payable under the Income Tax Act (on account of various deductions permissible under the Income Tax Act, 1961) is lower as compared to the tax paid on book profits, then Company has to pay tax on book profits u/s. 115JB. Further credit was available in respect of such excess tax paid by the Companies. Hence this additional tax paid on account of MAT was in the nature of advance tax paid by the Company.

The discussion paper on New Income Tax code unveiled on 11th August 2009 states that base for the tax code should be comprehensive definition of income. It further states that income for the purpose of this code, will, in general, include all accruals and receipts of revenue and capital nature unless other wise specified.

It seeks to introduce MAT in a very different form. It states that several countries have adopted minimum taxes based on a fixed percentage of the assets of a business. The economic rationale for the tax on assets is that investors can expect ex-ante to earn a specified average rate of return on their assets. Therefore, it provides an incentive for efficiency. Accordingly the code provides for Minimum Alternate Tax calculated @ 2% on "value of the gross assets" for Companies other than Banking Companies. It further states that the shift in the MAT base from book profits to gross assets will encourage optimal utilization of the assets and thereby increase efficiency. Hence a Company has to pay higher of the following as tax:
a)   25 % of the total taxable income or,
b)   Minimum alternate tax @ 2% of the value of gross assets (0.25% in case of Banking Companies).

Further it also states that credit of Minimum alternate tax paid by the Companies would not be allowed.

The above provision of taxing Companies by MAT surely has the following lacunas:
a)   Income Tax should always be on accrual/receipt of income and should not be charged on such presumptive basis (without any reference to the income earned).
b)   By not allowing credit of tax paid by way of minimum alternate tax, this tax is in the nature of wealth tax and not on income at all;
c)   This type of tax will clearly be an additional burden to loss making companies and will make their survival more difficult;
d)   In case of long gestation projects, this tax type of tax will further increase the cost of projects and might even make the projects unviable.
e)   This type of tax will be higher in case of highly leveraged companies and capital intensive companies.
f)   This type of presumptive tax will reduce investments in Infrastructure and will dissuade investments.

Hence based on the above, the MAT provisions in its existing form in the New Income Tax code needs serious reconsideration by the Hon'ble Finance Minister.

bhaskar rao

Dear Sir,

I was thinking on same lines but you have put it up in very reasonable manner. I hop Govt will pay attentiom and take corrective steps as otherwise there is great injustice and to be caused to the taxpayers.

Yours faithfully,

Bhaskar Rao, ITP. 


No body denies the issues raised by you. However  we have listened to Shri Arbind Modi on this issue. he has given very good srational

rates of tax on companiens are   @ 25 % . where to garner further revenue as the direct tax code is tax neutral.  Therefore only alternative left with the government is to  generate reveune from MAT. he  said MAt is not going to last long. His voewss were also that ineffecinet  use of assets and having long getstation time in projects which are  not in comparison with international stanadrad sof execution of the project has forced government to tax  it on asses bassis. He said there are more than 4.5 laksh companies and merely 50000  companies arepaying taxes accridng to regular method of taxation.
DTc has to be looked as a whole taxlegislature and not as indicula sections.  Therfore let us bear with this kind of taxation  for short term a and alos ensure that  Link whic  took 10 years should  have been over in 3 years. Ineefeceinet promoters and  owners should eb  penalised  as capital should chase effecient use of m national assets.

therfor emy view is that let us appreciate the views of government alos on this count.


I must say its a good move to levy tax on the assets of these MNCs because most of them, as pointedout by Modi, adopt such tax planing in which no tax is payble by them. For example most of them operates in SEZ or hire the services of those professional, whose hands are not clean such as the audiors of Satyam. Therefore, for our country  in which these people coming and exploiting our natural resourcse it is perfectly all right to levy tax in such a manner.


MAT has to be levied,if at all, on assets then it should be on Net Assets and not on Gross assets.

The thing is that exceptions shud be made in  case of power companies and other infra companies which have long gestation periods. Just for the sake of Simplicity you can't forego rationality.

Also NBFCs should be put at par with banks for MAT rate.