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On the MAT

Presenting the third of the rediff.com-Dun & Bradstreet India special Budget Impact series. This article analyses the impact of minimum alternate tax on companies.

The finance minister has rationalised the provisions in respect of taxation of foreign exchange earnings and in that process, he may have swept the majority of companies into the tax net.

Under the erstwhile Section 115JA, companies were required to pay a Minimum Alternate Tax -- MAT -- of 35 per cent on 30 per cent of their book profits if the total income computed (according to the Income Tax Act) was less than 30 per cent of the book profits. Thus the effective pay-out was at 10.5 per cent of the book profits. This section, however, had its deficiencies as it still allowed companies to avail of 100 per cent tax breaks on export earnings provided under three sections -- Section 80HHC, Section 80HHE and Section 80HHF. In effect, several companies were able to avoid MAT.

Under the new dispensation (Section 115JB), the government has ensured that all such companies would now need to pay MAT computed at the rate of 7.5 per cent. This has been achieved by limiting the tax exemption under the three respective sections to 80 per cent, 60 per cent, 40 per cent, 20 per cent and zero over a five-year time frame.

A major setback to the corporate sector is that the finance minister has withdrawn the tax credit (set-off) facility of MAT paid under Section 115 JB against the regular tax paid (non-MAT) in future years. Thus the earlier advantage of companies being able to treat MAT paid as a prepaid-tax to be set-off against future regular taxes has been eliminated.

MAT is actually an alternative tax system and in the true sense, just an acceleration of payment of taxes by companies. For this reason, Dun & Bradstreet believes that it would be appropriate that a company which pays MAT in any year should be allowed to get a tax credit of the same against future years's regular income tax liability.

In another significant move, the finance minister has limited the ten-year tax exemption status available under Section 10A (to units set up in free trade zones) and Section 10B (to 100 per cent export oriented units) to only those units set up on or before March 31, 2000. In sum, no more complete tax-exempt categories of companies would be born from April 1, 2000 and existing tax-exempt establishments would continue to enjoy their tax-free status till they complete their ten years.

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SECTOR IMPACT:

Automobiles | Banking | Cement | Cigarettes | Computer hardware | Fertilisers | Housing | Paper | Pharmaceuticals | Software | Telecom
Tyres

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PRE-BUDGET SECTOR ANALYSIS:

Automobiles | Cement | Cigarettes | Fertilisers | Hotels | Housing
Mutual funds | Paints | Paper | Petrochemicals | Pharmaceuticals
Power | Software | Steel | Tea and coffee

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