As opposed to normal tax, MAT , as the name suggests, is the minimum tax payable by a profitable company on its book profits even though no tax is payable by it under the normal provisions of the Act. The idea behind introduction of MAT was to bring into tax net those companies which were not paying any taxes on account of various exemptions and deductions but were recording book profits as per their financial accounts.
Ever since the introduction of MAT in 1987, there have been several amendments to the framework and methodology of MAT computation, which in the recent past have only increased the tax burden of companies. The MAT rate by itself has increased over the years from 7.5 per cent to 20 per cent, inclusive of surcharge and cess.The legislative amendments to the computation mechanism have had the effect of increasing the book profits, on which MAT is computed.
These amendments included addition of dividend distribution tax, deferred tax, provision for diminution in the value of assets, and non-exclusion of long-term capital gains. One of the prominent amendments hurting the industry relates to withdrawal of MAT exemption on Special Economic Zones (SEZ). Notably, the SEZ regime was introduced to act as a catalyst for the economic growth of India and a trigger for replenishing the flow of foreign and domestic investment.
The withdrawal of MAT exemption has been a bugbear for SEZ developers and units in India and the restoration of this exemption shall provide them the much-needed impetus for future growth. As an alternative, the industry is hopeful of a reduction in MAT rate to 7.5 per cent.
At present, when the government aims to build smart cities, improve ease of doing business in India, and give India a makeover of becoming the manufacturing hub, it is imperative that the manufacturing sector is given the right impetus from a tax standpoint. Budget 2015 offers an ideal platform for the government to walk the talk and take big strides to make Prime Minister Narendra Modi's "Make in India" dream a reality. Evidently, the challenge before the government is to offer investors the financial security and growth prospects which form the backbone of commercial rationale to invest in India. While an across the board reduction in MAT rate may not be a realistic expectation, it would be more pragmatic for the industry to expect relief specific to the manufacturing sector.
This will indicate the government's seriousness of treating this sector preferentially and on priority.
Some of the key tax initiatives which the government could take are, firstly, introduce a separate and lower rate of MAT for manufacturing companies. This will have the benefit of showcasing the government's clear mindset and focus towards promoting and incentivising the manufacturing sector.
Secondly, such companies could be allowed to claim MAT credit for an indefinite period as against the existing time limit of 10 years. Besides, a separate mechanism for computation of book profits of manufacturing companies could be introduced with the main focus of allowing certain deductions from book profits to reduce the charge of MAT. On this front, the government could allow deduction of investment allowance for MAT computation purposes. In last year's budget, the government had reduced the threshold limit from Rs 100 crore to Rs 25 crore, for claiming 15 per cent tax deduction of the actual cost of new plant and machinery installed by manufacturing companies. This provided a fillip to the manufacturing sector and acted as a catalyst for capital infusion.
To further leverage this benefit, the investment allowance could be permitted as an adjustment for MAT purposes. Besides this, the government may also consider allowing deduction for expenses incurred towards wages paid to new employees, and skill development expenditure from book profits. The same will be in line with PM Modi's thrust on skill development and employment generation. Lastly, manufacturing companies could be permitted to claim tax depreciation from book profits. As per the existing MAT rules, assessees can only claim deduction of book depreciation which is historically charged at lower rates.
It is imperative to introduce legislative amendments or issue clarifications to maintain the influx of foreign investment, which is the need of the hour. Recently, the Finance Minister indicated that complete MAT withdrawal can only take place if income tax rates increase concurrently. As a midway, the industry would be pleased to see differential and lower MAT rates for the manufacturing sector as the government prepares a roadmap to make India the manufacturing hub of the world.
(Views expressed are personal.)
(Girish Vanvari is Head of Tax at KPMG India)