TAX NEWS - 2010

Minimum Alternate Tax: There's no more hiding it under the 'MAT'

A minimum tax on gross assets is neither a new idea nor devoid of economic rationale. But the government must be gentle in enforcing it

It is said that a society gets the taxman it deserves. In countries where under-reporting of income is common, governments use tax variations to extract the money due to them. India has now added a clause to the Minimum Alternate Tax (MAT) to ensure that companies pay up!

The draft of the new Direct Tax Code proposes to levy a 2% Minimum Alternate Tax (MAT) on a company's gross assets, where applicable. This means that firms must to pay income tax on their profits or Minimum Alternate Tax (MAT) on their assets, whichever is higher.

The government contends that if gross assets are taxed, companies will make optimum use of their assets, leading to greater economic efficiency. In reality, it is well known that a lot of companies under-report revenues. With a tax on gross assets this phenomenon is expected to diminish.

India Inc, however, views this in a different light. "The tax code is draconian and as an industry we have protested. Direct tax is supposed to be taxed on profits and not on assets. This will affect capital formation." says Sunirmal Talukdar, chief financial officer of Hindalco. His argument is that entrepreneurs will be discouraged from creating assets if they have to pay tax on them.

Minimum Alternate Tax (MAT) has always been a contentious issue. An early avatar of Minimum Alternate Tax (MAT) was introduced back in 1983. Rajiv Gandhi thought it didn't work and introduced a full-fledged minimum tax in 1987. It was abandoned in 1994. Two years later, the then finance minister, P. Chidambaram, launched the current form of MAT to counter the rapid increase of zero-tax companies.