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Minimum Tax brings Maximum Woes!

MAT At 2% On Value Of Gross Assets Can Spell Corporate Doom!

Companies floored on MAT by hard tax punch!

  • Minimum Alternate Tax (MAT), to be paid at 2% on the gross value of assets of a company, presumes 8% average rate of return on assets, an impractical economic assumption in several cases. 
  • While Code aims at encouraging investment-linked tax incentives, the proposed MAT will be a huge disincentive for capital investment. 
  • Capital intensive projects, infrastructure ventures, undertakings in gestation period, loss making concerns, sick units, investment companies and even companies under liquidation, to be hit hard by levy of MAT. 
  • No scheme for grant of MAT credit, both harsh and iniquitous. 
  • No developed country in the world today (last being Mexico, who also scrapped it in 2007) levies such a naughty tax. 
  • No room for MAT in the new tax regime abolishing all profit-linked incentives.

 Some  Large MAT Casualties in Gujarat    (all figures Rs. in crores)

Name of Company

Gross Value of Assets

Current MAT Liability

Proposed MAT Liability

Sardar Sarovar Narmada Nigam Ltd.




Adani Power Ltd.





*No current MAT liability since book profit Nil.

*Proposed MAT liability worked out at 2% of the estimated value of gross assets in 2011-12

Corporate Tax Reduction Illusory!

            The apparent reduction in corporate tax rate as announced under the Direct Tax Code may infact prove to be illusory, since the proposed levy of MAT by way of 2% tax on gross value of assets of a company could in several cases actually turn out to be significantly higher than the normal 25% income-tax on taxable profits. Currently, MAT is attracted on book profits. However, under the new MAT trap, a large number of loss making companies or units in gestation or even liquidation will heavily bleed on the tax front.

            Whereas companies have been told that they are being moved out from the wealth-tax net, MAT threatens to be even worse than wealth-tax, in as much as there is no provision even to deduct the value of liabilities or exclude work in progress representing assets which have not even been put to use or ignore notional assets such as deferred tax.

 Woes Unlimited!

           There is further danger of multiple tax levies on the value of the same assets, where shares of a subsidiary are held by the holding company. In such a case, the subsidiary may be required to pay 2% tax on gross assets employed in its business and the holding company may again be called upon to pay MAT on the value of such shares of the subsidiary, appearing as investments in its balance sheet.

             The misery of the corporate sector, infected by the MAT virus, is bound to compound, with there being no relief for any MAT credit. Even the provisions for carry forward and set off of MAT credit available to a company as on 1st April, 2011 under the Income-tax Act have not been suitably grandfathered under the new provisions of the Code.

 Smooth Sunset Provisions Required!

            The present exemption from both normal Income-tax as well as MAT, offered to SEZ developers and SEZ units is conspicuously absent under the proposed Section 282 of the Code in relation to repeals and savings. Even in respect of units eligible to area and sector based deductions under the current Section 80 family of the Income-tax Act, while the balance period for deductions has been proposed to be continued, the computation of deductions in the old manner has not been assured, which raises critical areas of concern.

            Respecting the doctrine of promissory estoppel, the relevant reliefs in the above regard must be duly incorporated in the new grandfathering and sunset provisions under the Code.

 No sound economic rationale

            The justification in the discussion paper in defense of ‘asset-based MAT’ and the 8% average rate of return on assets (an altogether impractical economic assumption) is neither logical nor convincing. While the paper attempts to state that several countries have adopted asset-based MAT, it needs to be placed on record that   virtually no developed country in the world today has the levy of MAT in this mischievous and irrational form. Infact, Mexico being one of them also scrapped it in 2007 and has switched over to the income-based MAT since 2008.  

            While the draftsmen of the Code have one on one hand emphatically incorporated the proposals of the Kelkar task force to prune tax incentives and exemptions, they have unfortunately ignored the key recommendations of the panel in regard to scrapping of Wealth-tax and abolition of Dividend Distribution Tax (DDT) and MAT.

           It needs to be earnestly considered that there is no sound economic rationale to continue with MAT, in any form, under the new tax regime which has charted out a clear roadmap to abolish all new profit-linked incentives.


When the new tax regime has proposed to abolish all profit-linked incentives, is there any justification to continue MAT, more so by introducing the harsh levy of 2% tax on gross value of assets?

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