Minimum Alternate Tax

marginal Alternate Tax * Contributed under(a) income task * by vakilsearch Taxation on income is a vital cite of revenue for our Government. Although Companies have to follow a mind-bogglingly complex procedure, the list of exemptions and deductions is desire. As a result, a pickle of Companies used these deductions and exemptions and escaped impose liability. While they enjoyed book profits as per their profit and loss accounts (and sometimes even distributed dividend), tax liability as per the Income Tax Act was either nil or blackball or insignificant.To counter this problem the government came up with the concept of Minimum Alternate Tax (MAT) in the financial year 1997-1998. What is Minimum Alternate Tax? As per section 115 JA of the Income Tax Act, if a companys taxable income is less than a certain percentage of the book profits, thence by default, that much of the book profits will be considered as taxable income and tax has to be salaried on that. The current rate f or MAT is 18%, up from 7. 5% in 2001-2002. Since this is a really broad provision, sometime companies who genuinely deserve tax relief get stuck with MAT liability.Hence, a schema of MAT reference work entitlement was brought in. MAT Credit Under this system, if a company pays Minimum Alternate Tax, then the difference between the tax that would have been payable if there was no MAT and the actual tax paid under MAT regime can be carried advancing as a credit and can be stria off against any tax in the future that is not under the MAT regime. For example, if a company has a book profit of 10 lakhs and after applying the provisions of Income tax act, arrives at a taxable income of only Rs. 1 lakh, then MAT becomes applicable as 18% of 10 lakhs is 1. lakhs. However, the difference between the tax paid on 1. 8 lakhs and the tax calculation on 1 lakh is carried forward as MAT credit. Say, the next year, a profit of 11 lakhs is booked but this time due to some cost-cutting initiativ es, the company calculates a taxable income of 6 lakhs. Hence, MAT is not applicable as the taxable income is more than 18%. Here the company can choose to set off their tax liability with the tax credit they have from the last time when they paid MAT. Criticisms As can be easily seen, chapiter intensive companies like steel & construction etc. ave long been chronic victims of MAT and have lobbied for its removal ever since its inception. A lot of them are yet to receive a period where they havent had to pay MAT. And considering that MAT credit can be carried forward only for a period of ten assessment years at a time, it has led to capital erosion on account of MAT. It is another instance of short-sightedness on the part of the Government and one among many measures which cripple our global competitiveness for short-term revenue collection. (Contributed to The Hindu Business Line)