Asset-backed MAT unlikely to take effect

While drafting the code,it was felt that asset-based calculation of MAT was an efficient way to encourage optimal utilisation of assets. After due consultation with experts,the CBDT now fears companies will start showing reduced value of assets on their books of accounts to pay a lower tax.

For example,land purchased for Rs one crore may be shown as being bought for only Rs 60 lakh to avoid payment of a higher MAT. The balance money could be paid in black.

Experts say that the tax itself will act as a disincentive in asset creation,with companies turning wary of paying huge taxes. “This is like imposing a tax on the entire balance sheet of a company irrespective of the profit it makes. If the government wants to tax non-productive assets,it should identify them and tax them,” Sandeep Chaufla,Partner,KPMG said.

According to experts,since the MAT would be on gross value of assets,companies would pay tax even though there is no profit,mainly affecting infrastructure companies which have long gestation periods. At present,MAT is levied at the rate of 15 per cent on the book profits of zero tax companies. Further,MAT credit is allowed to be carried forward and set off against tax liabilities over the ensuing 10 years.

Experts also pointed out that with India committed to converge with international financial reporting standards (IFRS) by 2011,firms will have to mark their assets to market. That means they will have to pay taxes on revalued assets. So,for example,if a company has a land bank of Rs 2 crore and after revaluing,the value becomes Rs 2.5 crore,firms will have to shell out extra tax.

“I think the government must review it as it would be a big disincentive for firms desiring to create assets. Even if they have losses,they will have to pay tax,which is irrational as the income tax act aims at taxing income and not losses,” Sudhir Kapadia,Executive Director,PwC said.