Upgrad LLM

growing tentacles of mat

Corporate Laws and Indirect Taxation Laws Practitioner.

 The corporate sector and the salaried class have always been the Finance Ministers’ favourite whipping boys. And they continue to be so. The Finance (No.2) Bill, 2009 shows no remorse to them. The withdrawal of the Fringe Benefit Tax (FBT) has rightly been hailed. But if one examines the issue deeply, the withdrawal of the FBT far from resulting in loss of revenue would in fact boost it — the FBT targets but an ad hoc percentage of certain expenses whereas taxing employees directly would fetch more revenue — even though its abolition admittedly is a step in the right direction as taxing the beneficiary directly is more equitable any day.

CORPORATE BURDEN

What is worrisome, however, is the proposal to impose a heightened burden on corporates by way of Minimum Alternative Tax (MAT) — the basic rate of tax on book profits would go up from 10 to 15 per cent. To start with, it was 7.5 per cent. In its original form, MAT assumed 30 per cent of the book profits as the taxable income in case the actual taxable profits turned out to be lesser. Its raison d’etre was a genuine grouse harboured by the Government — paying handsome dividend to shareholders even while thumbing the nose at the taxman. Now that there is a separate tax payable by a company on dividend distributed, that grouse has obviously been taken care of and therefore there is no justification for continuance of MAT. But the Explanatory Memorandum to the Bill has invented a new alibi — too many tax concessions whittling down the taxable income. This is shocking. If there are too many tax concessions, why doesn’t the Government remove them? It is ridiculous to make a grievance out of one’s own largesse. In its pristine form MAT — though not called as such — was imposed vicariously by restricting the deductions from a company’s Gross Total Income (GTI) to 70 per cent thereof and allowing the remaining 30 per cent to be carried forward. This was less iniquitous to the corporate sector inasmuch as there was no straying away from taxable income and focusing on the book profit. In addition, there was no permanent disallowance of the tax benefits. What is more alarming is the grim possibility of MAT in course of time displacing the actual scheme of taxation as far as companies are concerned given the steady increase in its rate. The simultaneous increase in the carry forward period of the resultant excess tax paid from seven to 10 years proposed in the Bill is cold comfort given the fact that no set off is permitted if the actual tax liability in these years turns out to be equal to or less than 15 per cent of the book profits. Set off is allowed only to the extent the tax liability in these years is an amount that is in excess of 15 per cent of the book profits.

AN ILLUSTRATION

To wit, let us say a company reports a total income of Rs 10 crore on which the tax payable is Rs 3 crore but its books show a profit of Rs 100 crore. Obviously, it will have to pay MAT of Rs 15 crore but can carry forward the excess tax paid, that is, Rs 12 crore, for the next 10 years for set off at the earliest opportunity. But the issue is not as simple and equitable as it appears because if in the next year, for example, the total income is just Rs 20 crore, warranting a tax of Rs 6 crore and its book profits are only Rs 30 crore, MAT of course would not be attracted because the actual tax of Rs 6 crore is more than the notional MAT of Rs 4.5 crore. But it cannot salivate at the prospect of setting off of the entire excess tax paid last year because tax has to be shelled out in cash at least to the extent of Rs 4.5 crore, i.e., the minimum tax payable (the notional MAT) as per the MAT formula. Therefore, even though it has got Rs 12 crore by way of MAT credit, as it were, it can set off only Rs 1.5 crore. In the event, it will have to carry forward the remaining Rs 10.5 crore for set off within the next nine years. This is patently unfair. The carry forward regime then is a grudging concession. What it boils down to is this: no matter whether MAT is on or not in a given year, tax to the extent of 15 per cent of book profits must be paid in cash. There is a grim portent in this — the carried forward MAT could well lapse at the end of the tunnel — the tenth year. Alas, for corporates there would be no light at the end of the tunnel.

EMBRACE LLP

MAT is one singular force that is going to drive wannabe companies into LLP’s arms because its tentacles encircle even closely-held companies. In fact, DDT and MAT from whose tentacles a Limited Liability Partnership is free, are going to be the twin gravitas for all non-listed companies to enter the LLP bandwagon. Of course, the existing and new partnership firms would also prefer the LLP mode now that the tax code has been spelt out. In the event, listed companies alone would remain in the corporate sector because otherwise it cannot attract public funds.

 
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