MAT structure may be altered

With corporate tax exemptions set to come under close scrutiny, the finance ministry is likely to review the structure of the minimum alternate tax in Budget 2007-08...

With corporate tax exemptions set to come under close scrutiny, the finance ministry is likely to review the structure of the minimum alternate tax MAT in Budget 2007-08, and bring it in line with the recommendations of the Parthasarthi Shome committee on tax policy and administration.

The committee headed by Shome, who is now the finance minister8217;s economic advisor, had recommended that MAT be merged with dividend distribution tax.

8220;A new MAT rate on corporations should then be introduced as a tax equal to the aggregate of 0.75 per cent of adjusted net worth and 10 per cent of dividend distributed,8221; the report said. The adjusted net worth was defined as the capital employed by the company.

In a surprise move in Budget 2006-07, Union finance minister P Chidambaram had increased the MAT rate on book profits to 10 per cent from 7.5 per cent. While he increased the time span for claiming credit on the tax to seven years, he brought long-term capital gains of MAT companies under the tax net by including them in book profits.

A finance ministry study shows that one-third of all taxable companies, or 593 of them, recorded profits less than or equal to zero in assessment year 2004-05 and contributed just 9.23 per cent of the total corporate taxes.

The change to a tax based on a company8217;s net worth from the current levy based on a company8217;s book profit could not only reduce the problem of tax evasion based on under reporting of transactions, but also help increase the effective tax on these companies. Experts estimate the shift would enrich the exchequer by an additional Rs 10,000 crore.

Ganesh Raj, tax partner, Ernst 038; Young, however, said, 8220;While the new system will have affected companies claiming huge tax sops, it will completely change the nature of MAT. It will be more of a compulsory tax for all companies rather than for zero tax companies.8221;

Story continues below this ad

However, some tax experts feel that withdrawal of minimum alternate tax would be a better idea. Vivek Vasal director, KPMG, said, 8220;If the government is serious about reducing the number of tax exemptions, it definitely needs to withdraw MAT.8221;