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MAT revision likely in Budget

Differential rates could be introduced for small firms, SEZs and the infra sector

Jayshree P Upadhyay  |  New Delhi 

In a move aimed at giving a push to its ‘Make in India’ programme, the government could introduce in the coming Union Budget a differential minimum alternate tax (MAT) rate for certain segments of domestic manufacturing.

According to those privy to the development, the Budget makers are looking to give an impetus to Indian manufacturers, particularly the micro, small and medium enterprises (MSMEs), special economic zones (SEZs) and those in the infrastructure sector..

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“We are considering bringing in the Budget a differential rate of MAT for MSMEs and SEZs. But nothing has been finalised yet,” said an official. MSMEs account for eight per cent to India’s gross domestic product.

MAT for key sectors was under review, said another. “MAT for all sectors that are crucial to development of the nation, such as infrastructure, SMEs and SEZs, is under review, and is likely to be part of the Budget,” he said.

The government had introduced MAT to ensure no profit-earning company used exemptions and incentives to avoid tax liability. The current rate for MAT is 18.5 per cent; the effective rate goes up to 20 per cent after including surchange and cess. The rate for corporation tax, 30 per cent at present, nearly touches 33 per cent with cess and surcharge.

Though the differential MAT has not yet been finalised, it is believed to be set in the range of five per cent to 10 per cent.

Looking at ways to incentivise and promote domestic manufacturing, the commerce & industry ministry had earlier this year made a pitch for lowering of MAT for domestic manufacturing. So far, there is no specific provision in the income-tax Act to incentivise domestic manufacturing, though certain relief is given to SEZs. The pitch is for restoring relief for SEZs and providing SMEs with some leeway.

“A separate and lower rate of MAT for manufacturing companies could help showcase the (Narendra) Modi government’s clear mindset and focus on promoting and incentivising India’s manufacturing sector. Such companies could also be allowed to claim MAT credit for an indefinite period, as against the existing time limit of 10 years,” said Naveen Agarwal, partner, KPMG in India.

MAT credit can be carried forward for only 10 years — almost corresponding with the holiday period for SEZs. This 10-year restriction, coupled with the way MAT set off is allowed under the existing tax provisions, results in permanent loss of a significant portion of the MAT paid.

“This is a significant dampener and goes against the spirit of treating SEZ units as tax-free zones. With the government planning to give a boost to the manufacturing sector, the industry needs to see relaxation on levy of MAT and probably DDT (dividend distribution tax) on SEZ units,” said Rajesh H Gandhi, partner, Deloitte Haskin & Sells LLP.

The proposal to impose MAT on book profits — of both SEZ developers and units in these enclaves —was announced in Budget 2011-12 by the then finance minister, Pranab Mukherjee. Besides, DDT at almost 20 per cent was also imposed for dividend distributed to shareholders.

MAT came into effect from April 2012, amid severe protest from SEZ developers and units. It was introduced through a proposal in the Finance Act, even as the SEZ Act specifically mentioned a stipulated tax holiday be given to these zones.

Another measure specific to manufacturing companies, pressed for by industry and being considered by the government, is allowing deduction of investment allowance for MAT computation purposes.

In the previous Union Budget, the government had reduced the threshold for claiming the 15 per cent tax deduction of the actual cost of new plant and machinery by manufacturing companies from Rs 100 crore to Rs 25 crore.

This provided a fillip to the manufacturing sector and acted as a catalyst for capital infusion.

The investment allowance could be permitted as an adjustment for MAT purposes.

  • Differential MAT could be introduced in the Budget for SMEs and SEZs; revision could be in the range of 5-10%
  • MAT was introduced to ensure no profit-earning company used exemptions and incentives to avoid tax liability
  • The current rate for MAT, at 18.5%, goes up to 20% with surcharge and cess
  • The pitch for differential MAT rate for various sectors came from the commerce ministry, which has been looking at ways to promote domestic manufacturing
  • The government is also considering deduction on investment allowance for MAT computation purposes

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First Published: Mon, February 02 2015. 00:59 IST