The government's proposal to compute minimum alternate tax on profits, and not on assets as planned originally in the direct taxes code, has put a smile on the face of industry. However, there is no clarity on tax rate and credit mechanism.
"It is clearly good for India Inc," said Mukesh Butani, head, tax practice at BMR & Associates. "However, it is not clear as to what would be the rate of MAT, presently at 18 per cent."
MAT is creditable against corporate tax that can be carried forward for eight years. But the revised direct tax code is not clear whether this credit mechanism will be there.
The original draft code had prescribed a 25 per cent corporation tax and a MAT of two per cent on gross assets for companies. It also changed the basis for computing MAT from book profits to gross assets. MAT was proposed to be paid even during loss-making years, with no set-off against future profits.
"There may be practical difficulties and unintended consequences, particularly in case of loss-making companies and companies having a long gestation period," the government said in its new draft. "It is, therefore, proposed to compute MAT with reference to book profit."
While the computation of MAT on gross assets would not have affected the service sector companies, it would have seriously impacted large capital-intensive companies in infrastructure, oil and gas, telecom, pharmaceuticals, real estate etc.
"A levy on gross assets artificially tried to infuse productivity which was not possible," said Akil Hirani, managing partner, Majmudar & Co, a Mumbai-based corporate law firm. "It is now a big relief to Indian companies."
"Ideally, the MAT provision should not be there, as there is no profit-based incentive introduced in the direct taxes code," said Ajay Kumar, executive director at PricewaterhouseCoopers.
