Taxation, a term most of us find difficult to understand. When already existing taxation structure itself is not clear for public what is all about Minimum alternative tax (MAT) that is introduced recently. Government keeps adding and deleting legislations to taxation structure in India. The Government which removed wealth tax and reduced corporate tax to 23% in Budget 2015 – 2016 added Minimum Alternative tax (MAT) into the system.
Not only individuals, even well established corporate unearth loop holes to escape from paying taxes. MAT is introduced by GOI to catch hold of those companies that try to elude tax payment. MAT can also be described as “Minimum Amount of Tax”. MAT being an alternative for Income tax; it falls under direct tax category.
Companies, in general sketch 2 financial statements for every FY, one in terms of Companies Act and other in terms of Income Tax Act. The financial statements will differ in respect to the legislations followed. In general, Net profit obtained by following Companies Act will be greater than net profit obtained through Income Tax Act. Tax to be paid by companies will be a % of net profit reported as per Income tax Act.
Income tax Act in order to encourage corporate functioning provides high leverage in depreciation. To state with an example, energy generating companies are allowed to depreciate wind mills and other core machineries up to 100% with a useful life of 1 year. Also, computers can be depreciated upto 60% in Income Tax Act, compared to 30% in Companies Act. Similarly, most of the depreciation percentage for tangible and intangible assets differs between both the Acts. Depreciation is manipulated in terms of residual value and life of the product as per the respective Act.
With the nourishment obtained through Companies Act corporate are benefited to produce high profits through companies Act which can be published for public’s notice and through the benefits sought from Income tax Act corporate are viable to pay either less or zero tax. Companies that show goof profit through Companies Act and pay no tax through Income Tax Act are termed as “Zero tax” companies. These Zero tax companies show negative profit in their statements but end up paying dividends to share holders.
MAT is being planned to be used as a rope to catch hold of these zero tax paying companies. Companies that show profit through companies Act, has to pay 18.5% of profit before depreciation through Income tax Act. MAT would increase GOI’s revenue this year with no doubt. Also, as a surprise move GOI has decided not to implement MAT for FIIs. This action is to attract foreign investors towards India.