There Is No Alternative To at'

The storm raised against the levy of the minimum alternate tax (MAT) on companies has settled down, with the passing of the Finance Bill. MAT has withstood many googlies and bouncers and the pitch has been saved from getting substantial cracks after fierce attacks from the corporate sector in general and exporters in particular. However, two cracks could not be saved from coming up. While moving the Finance Bill for the consideration of the House, the finance minister consented on giving two more exemptions. These are:

Industrial undertakings located in industrially backward areas are entitled to claim 100 per cent deduction under Section 80IA of the Eighth schedule of the IT Act.

Sick companies' profits will be exempted during the period they are treated as such under the SICA.

The MAT on companies envisages a minimum tax on 'zero tax' companies or the companies who pay tax on incomes much less than the profits disclosed in their published accounts. Such companies will now pay a corporate tax on 30 per cent of the book profits, if their total income, as computed under the IT Act, is less than 30 per cent of the book profits as per the books of accounts prepared in accordance with the provisions of the Companies Act 1956. Book profit has been defined in the explanation to sub-section (2) of new Section 115JA.

The new Section provides for a mandatory levy of 30 per cent tax on the book profits, if these are computed under the IT Act and are less than 30 per cent of the book profits with no alternative. The levy is binding, and leaves no choice or escape route to the assessees. The emphasis is on income "" not on taxes calculated in two ways: the word 'alternative' postulates two or more mutually exclusive choices available to a person.

In the scheme of the proposed Section, no choice is available to a company, if its income tax profits are found to be less than 30 per cent of the book profits. It has to pay a minimum tax which works out to 12.9 per cent on 30 per cent profits. Given this situation, the levy should have been termed as a 'minimum tax' instead of a minimum 'alternative' tax.

The phrase 'alternative' seems to have been mechanically adopted from foreign tax laws, ignoring the fact that the scheme of levying a minimum tax in India is different from those prevalent elsewhere, where 'alternatives' concerning minimum levies are available. For example, the philosophy behind 'AMT' in the US is the same as in India, namely the belief that many of the tax deductions and credits that were designed to encourage various preferred activities led to taxpayers reaping economic benefits, without contributing much by way of federal income tax. Hence, in 1987, a broad-based AMT (alternate minimum tax) was designed to broaden the tax base, upon which the tax at normal rate is computed. On this base, a further fixed rate of tax at 20 per cent is levied, minus the permissible exemptions. If this computation results in a higher tax liability than the regular tax, this alternative then becomes the tax payable.

A corporation's regular tax is its liability for IT purposes, as defined in Section 26(b) of IRC. AMT is the amount by which the corporations' tentative minimum tax exceeds the regular tax for the year. Thus, there are two alternatives and a taxpayer has to pay in accordance with the alternative which gives more revenue to the Treasury.

In Nigeria, the IT rate for companies in 1994 was 35 per cent. However, they were also required to pay a minimum tax, if the minimum was greater than their actual tax liability. Minimum tax was to be computed by first determining the highest of the following.

0.5 of gross profit;

0.5 per cent of net assets;

0.25 of paid up capital;

0.25 per cent of turnover upto 5,00,000.

The company then adds 0.125 per cent of turnover exceeding this figure to determine the minimum tax. The higher of the two "" minimum tax orregular tax "" becomes payable.

It is thus clear that the word 'alternative' is used in situations where two options are available to taxpayers. Where there is no alternative, only the phrase 'minimum tax' is used. For example:

In Mexico, a tax of 1.8 per cent is levied on net assets (TNA) of resident corporations and non-resident corporations that have a permanent establishment in Mexico, as also on non-resident corporations without a permanent establishment in Mexico, if they maintain machinery or equipment and inventories for processing in Mexico.

In Honduras, beginning from 1994, an annual tax of 1 per cent is imposed on net assets (TNA) of trading companies on resident and non-resident corporations, with respect to their assets that are located in Honduras.

Both the above mentioned taxes are called 'minimum tax' and not 'alternative minimum tax'.In the proposed 'MAT' there is no choice given to a corporate taxpayer. It has to pay tax on 30 per cent of its book profits even if the IT profits fall below this limit. Hence, the word 'alternate' or 'alternative' in MAT is redundant.

Though the 'MAT' is here to stay, it should only be a short-term strategy to raise revenue. The ultimate solution lies in phasing out tax preferences over the years. It is incongruous to load the tax laws with tax preferences which help reduce the tax base. MAT should be imposed for making up the revenue loss and tax committees should be appointed to simplify the law./font>