India Inc is complaining the benefits of the investment allowance announced by the United Progressive Alliance last year and in the National Democratic Alliance's budget yesterday get negated by the minimum alternate tax (MAT).
Tax lawyers said the MAT was computed at 18.5 per cent - 20 per cent, including cess - of book profits under the Companies Act. The investment allowance announced by Finance Minister Arun Jaitley on Thursday falls under the Income Tax Act, which is not applicable as a deduction for computing book profits under the Companies Act.
"Consequently, a company governed by the MAT cannot effectively avail the incentive on investment on capital goods. It is for this reason that industry has been demanding scraping of the MAT," said Nand Kishore, head of tax practice at HSA Advocates.
Godrej Group Chairman Adi Godrej said while the provision reducing the investment allowance from Rs 100 crore to Rs 25 crore was welcome, it would not spur capital expenditure because of the MAT. A Godrej Group executive who did not wish to be identified said industry was expecting the MAT to come down significantly because it would then push up investment.
On Thursday, Jaitley extended the benefits of the investment allowance as an additional tax incentive to manufacturing companies investing in new plant and machinery. A tax partner with PriceWaterhouseCoopers said this incentive for manufacturing introduced last year was availed by some large state-owned companies. To boost mid-sized manufacturing companies, the proposal this year is to allow 15 per cent deduction on cost of plant and machinery of Rs 25 crores installed in a year.
"As it happens in the case of many companies that avail tax exemptions, the tax liability under normal provisions falls short of the MAT, which is calculated at the rate of 18.5 per cent of the book profits (for which these incentives are not considered for calculation). So, despite being allowed the incentive, such companies end up paying the MAT. However, these companies are eligible for credit for the MAT paid against future tax liabilities," said Sandeep Chaufla, executive director, direct tax, at PriceWaterhouseCoopers.
Jaitley proposed a deduction of 15 per cent over and above the annual tax depreciation to a manufacturing company that invests more than Rs 25 crore in plant and machinery in a particular year. The deduction was introduced by the then finance minister P Chidambaram last year with an investment threshold of Rs 100 crore.
A lawyer with Khaitan & Co said there were other restrictions under the scheme. If plant and machinery is transferred, other than by way of amalgamation or demerger, before the end of five years from the date of installation, then the amount of deduction allowed will be treated as income of the transferor in the year of its transfer. In the case of an amalgamation or demerger, this restriction shall continue to apply to the amalgamated company or resulting company, as the case may be. Also if a company is eligible to claim the incentive provided in the last Budget, it will not be entitled to claim another deduction under the new provision.
One of the biggest beneficiaries of the scheme will be Reliance Industries, which is investing close to Rs 180,000 crore in new capacity in the next three years. A large number of public sector companies are also investing in new projects and will benefit, provided the government takes care of the MAT hurdle.
Industry bodies like the Confederation of Indian Industry are lobbying hard for a reduction in the MAT before the budget is passed by Parliament. Godrej said yesterday the new finance minister needed to reduce the MAT rates considerably before the budget was passed.