So what if i (the taxpayer) earn tax-free income, i still end up paying MAT! This expression is commonly found amid the Indian Taxpayers. The basic issue which leads to the above situation is that under the Indian Income-tax Act, 1961 (' the Act'), the taxpayers (who are Companies) are required to compute their taxes (a) as per the provisions of Minimum Alternate Tax ('MAT'); and (b) under the Normal Provisions of the Act, and pay resultant tax which is higher of the above two - (a) or (b). Interestingly, in addition to MAT which is applicable only on Companies, we see a new regime of Alternate Minimum Tax or AMT emerging which will be applicable on Taxpayers other than Companies.
MAT has been specifically dealt with in Chapter XII-B of the Act. It says that the book profits which are shown in the profit and loss account of a company for a particular year has to be adjusted (by making additions / deletions) with certain prescribed list of items and tax is computed at 18.5% of such adjusted book profits. For instance, if a company has a net profit of INR 100 in its profit and loss account, then for MAT computation purposes, one has to take such base figure of INR 100, (+) add to it the amount of income-taxes paid by the company and a whole list of other prescribed items and also (-) reduce therefrom, such income which is exempt u/s 10 of Act and other such prescribed items. On the adjusted book profits, MAT will be computed by applying 18.5% on such adjusted profits. There is also a concept of MAT credit which exists in the Act.
As regards the Normal Provisions of the Act, all provisions of the Act other than MAT or Chapter XII-B mean the normal provisions. Computation of tax under normal provisions of the Act in our example means taking the book profit of INR 100 as base figure and making additions / deletions to it of all the respective items as may be applicable as per the normal provisions of the Act. Thereafter, tax is computed at 30% on such profits. As mentioned earlier, the taxpayer will have to discharge the higher of (a) MAT computed at 18.5% on book profits; or (b) Normal Tax computed at 30% as per normal provisions of the Act.
At this stage, lets look at the principal difference in MAT and normal provisions of the Act. MAT provisions are a relatively newer concept in the tax laws (introduced from 1987). It basically intends to bring to the ambit of tax such companies who earn/book profits (by following the Generally Accepted Accounting Norms) but gets it all exempt by taking benefit of the normal provisions of the Act. Thus, MAT has more proximity with book profits computed as per GAAP and allows very bare minimum adjustments in computation for tax purposes. Normal Provisions are relatively older set of provisions, despite having legislated by the same lawmakers (who govern MAT provisions) and under the same Income-tax Act, have numerous exemptions and tax benefits offered to taxpayers - may be driven by several economic, political and other considerations. The deductions, exemptions and other benefits provided under the normal provisions of the Act are typically not there in the MAT (few common exemptions are there such as certain income exempt u/s 10 of the Act are not subject to tax either in MAT or normal tax). By way of an example, one principal difference commonly found is that under the normal provisions, the taxpayer can claim significantly higher rate of depreciation and reduce its taxable income, however, under MAT, it is allowed a relatively lower amount of depreciation expense benefit.
Thus, emerges an interesting and often complicated jugglery of the tax law, where a taxpayer has to make 2 computations of tax - (a) under MAT provisions; and (b) under normal provisions and then decide about the final tax (as we saw, higher of the two). It may often happen that the same taxpayer who would claim to draw a benefit under the normal provisions of the Act, get denied such benefit under MAT. Thereby, end up paying tax on a 'potentially' tax-free income. To go back to our example, while it would be possible for a taxpayer to get the whole amount of INR 100 exempt / tax-free under the normal provisions of the Act and would pay no taxes. However, it may still happen that on the same INR 100, the taxpayer might end up paying 20% tax since the benefit / deduction as available under the normal provisions is not available in MAT. Accordingly, MAT seems to take away a lot of benefits which are otherwise available to the taxpayers under the normal provisions of the Act.
Now the MAT credit : whenever a taxpayer pays MAT, it is eligible to get MAT credit. MAT Credit is the excess of MAT paid over normal tax. In our example, if the taxpayer's tax liability as per MAT is INR 20 and tax liability as per normal tax is INR 10, it is eligible to claim MAT credit of INR 10 (excess of MAT over normal tax liability). The taxpayer can carry forward such MAT credit and set off against the normal tax liability, if any, which may arise in the future years. Thus, if in our example, if the taxpayer has the tax liability of INR 20 under normal provisions in the immediate next year and MAT liability is INR 10, then it can claim set off MAT credit of INR 10 against its normal tax liability and thus pay only INR 10 (INR 20 normal tax reduced by INR 10 MAT credit). MAT credit can only be carried forward to for a period of 10 years and set off in the manner aforesaid against thy normal tax liability. Thus, MAT credit can serve as an effective way of reducing tax liability in the future years when there are normal profits expected.
However complicated or harsh it may sound, the reality remains that MAT and / or AMT exists under the Indian tax laws and do operate as fully acceptable and constitutionally approved statue. Unsurprisingly, this kind of concept is also found in several other countries - for instance Mauritius, also by US Federal Government, to name a few.
Going back to where we started - if a taxpayer earns tax free income (under normal provisions of the Act), will it have MAT thereon or is it possible to get it held as completely tax free.
On this aspect, an interesting situation arose before the the Hon'ble Mumbai Tax Tribunal ('ITAT') in one of the recent case-laws of Shivalik Venture Pvt Ltd, concerning whether to pay MAT on an otherwise tax exempt income. In this case, during the year 2008-09, the taxpayer (Shivalik) transferred certain development rights to its subsidiary and earned some income therefrom. The taxpayer booked in its accounts such income as 'extraordinary income' and mentioned in its notes to accounts that such income is a capital receipt and the transaction is not regarded as transfer under the Act. Also, that such income is not includible in its net profits for MAT computation purposes.
At the time of tax computation, the taxpayer, under the normal provisions of the Act, claimed such income as exempt. Also, under MAT, the taxpayer claimed that such income, by virtue of the specific disclosure given in its notes to accounts, would not form part of the 'book profits' for MAT computation and would therefore be tax free. To this, the Hon'ble Mumbai ITAT upheld the taxpayer's contentions and decided the case in favour of taxpayer. The Hon'ble ITAT based its judgement on the principle that the said income do not fall under the definition of 'income'. Also for MAT purposes, the profit arising to the taxpayer as per the GAAP would have to be adjusted by reading the notes to accounts and thereby, the book profits for MAT purposes would not include such income.
In the aforesaid case-law, several of the judicial precedents were discussed and debated by the disputing parties : such as Rain
Commodities Ltd v. DCIT (131 TTJ 514) wherein it was upheld that MAT would be levied on an otherwise tax exempt income. However, this case was distinguished basis that the taxpayer did not make a disclosure in its notes to accounts as done by Shivalik Ventures. Another case was Hon'ble Delhi High Court : Sain Processing & Weaving Mills (P) Ltd (325 ITR
565) where the taxpayer did not charge depreciation to its Profit & Loss account, but disclosed the same in the Notes forming part of
accounts. However, while computing book profit under MAT, it claimed
the amount of depreciation as deduction from the Net profit disclosed in the
Profit and loss account and was allowed such benefit. Also, Hon'ble Pune
ITAT : K.K. Nag Ltd Vs. Addl CIT (2012)(52 SOT 381) where the incremental liability towards
leave encashment was not debited to the taxpayer's Profit and Loss account, but otherwise
disclosed in Notes to Accounts. The Hon'ble Tribunal upheld that the said liability would
have to be deducted while determining “Book Profits” for MAT purposes. On similar lines, the decision of Visakhapatnam
ITAT : Hindustan Shipyard Ltd Vs. DCIT (6 ITR (Trib) 407).
As one can experience, the fight to claim an income exempt under the normal provisions of the Act and thereafter being made to pay MAT thereon is an ongoing and one of the most complicated and burning dispute in the Indian tax laws. It has several complications around it and as we have seen above no straight and time tested answers /ways to deal with. Thus, calls for the taxpayers to deal with the problem in a proactive and smarter way and change the convention to - While i earn tax free income, i might not have to pay MAT thereon as well.
