Friday, January 16, 2015

On the MAT

"There were only two things certain in life: death and taxes."

Ben Franklin was quite right when he said this. In India, however, some certainties turn up as an after-thought. MAT is one of them.

Minimum Alternate Tax (MAT) was a term that was perhaps coined by the Americans, and borrowed by the Indian taxman in 2010. The dilemma he faced was fairly straightforward. Under the Income Tax Act (1961), he was expected to tax companies at a standard rate of ~ 30 percent.

Yet, when he went around checking with companies on tax deposited, he found that even the most profitable companies (including those paying dividends), were showing nil or negative income in their tax returns - thanks largely to various provisions under the Companies Act that permitted deductions, depreciation, etc.,

So we had a strange situation where companies would proclaim to its own shareholders about how well their company was performing, but when it came to the tax man, it was a different tune.

The solution was to give the tax payers two choices - calculate your returns the normal way, under ITA(1961), or at 18.5 percent of your book profits under MAT - and pay whichever was higher!

Now the problem with such a blanket rule was that firms located in the so-called "duty-free" zones like SEZs also had to shell out MAT, adding to their woes about doing business in India.

No wonder the SEZ developers are praying for some relief during the forthcoming Budget Session of the Parliament!



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