Proposed MAT rate could be cut by 1%

Proposed MAT rate could be cut by 1%
The Financial Express, October 26, 2009, Page 1

Surabhi, New Delhi

In the wake of concerns raised by India Inc over the contentious provisions in the draft Direct Taxes Code, the finance ministry has begun reviewing two of its key proposals relating to minimum alternate tax (MAT) and general anti-avoidance rules (GAAR).

Based on representations from trade and industry, the Central Board of Direct Taxes (CBDT) is looking at the possibility of reducing the MAT rate from the proposed 2% on the value of gross assets. “We are looking at various options at present. The rate could be brought down by 0.5% to 1%,” an official said.

The Direct Taxes Code has proposed a radical shift in the concept of MAT from gross profits to gross assets. While banks will be charged at a rate of 0.25%, all others will pay at 2%. The move is aimed at widening the corporate tax base by preventing evasion.

Revenue secretary PV Bhide had recently pointed this out. “The country has over 4.50 lakh registered corporate bodies of which only 50,000 corporates pay taxes. A simplistic interpretation of this could either mean that these are inefficient corporates or there is income being concealed. Our endeavor is to reduce this,” he said.

But tax experts argue that a 2% MAT on gross assets could end up to be as much as or even more than 25% of the profit of a company. Moreover, they say companies in sectors with a long gestation period like infrastructure would have to end up paying the tax even if they make a loss.

Commenting on the revised proposal, Amitabh Singh, partner Ernst and Young said, “Instead of tinkering with the tax rate, we should look at the very principle of MAT. The earlier principle of MAT on gross profits was more appropriate. Alternatively, a low enough rate under the proposed model with a facility to carry forward could also be feasible.”

CBDT is also planning to dilute the stringent provisions of the proposed GAAR. At present, the Code proposes that under GAAR the revenue department can make a presumption that an arrangement is entered into by two entities for tax benefit (tax avoidance) alone, unless it is rebutted by the taxpayer.

The income tax department now plans to bring in specific provisions outlining situations and conditions when such a presumption would be made so that all deals and transactions are not scanned for tax evasion.

The department is also looking at the proposed tax regime for long term savings by individuals. The Code seeks to bring savings into retirement funds into the exempt-exempt-tax (EET) regime from the current exempt-exempt-exempt system (EEE).

The CBDT’s decision to review the Code comes after finance minister Pranab Mukherjee announced earlier this month that the government would re-examine seven crucial proposals in the draft Direct Taxes Code including those relating to minimum alternate tax (MAT) and EET regime for savings. The other proposals that would be reviewed include capital gains taxation in the case of non-residents; the Income Tax Act and the double taxation avoidance agreements (DTAA); General Anti-Avoidance Rule (GAAR); issues relating to effective management control and taxation of foreign companies in India, and taxation of charitable organisations.