The finance ministry might abolish the minimum alternate tax in the Budget for 2003-04. The tax is charged at 7.5 per cent of the book profit of zero-profit companies and nets around Rs 3,000 crore (Rs 30 billion).
The revenue department has discussed threadbare whether the tax should exist and has concluded that it can be abolished if corporate tax exemptions are scrapped.
A detailed presentation on this was made to the task force on direct taxes headed by Vijay Kelkar, adviser to Finance Minister Jaswant Singh.
Kelkar, in his final report, recommended elimination of the tax, stating that the divergence between taxable income and book profit undermined corporate governance.
An earlier tax advisory group headed by Parthasarathi Shome, too, had pointed out that the tax was based on income reported by companies, unmindful of widely prevalent under-reporting.
It also said the provisions of the minimum alternate tax did not resolve the gap between the statutory tax rate of 38.5 per cent and the effective tax rate of 28.15 per cent, based on a sample of 1,816 companies in 2001-02.
Companies make various adjustments before arriving at book profits, like deducting profits from operations in backward areas.
The minimum alternate tax was introduced in 1987 and withdrawn in 1990. It was re-introduced in 1996 and amended in 2000 to provide for a 7.5 per cent rate.