Budget 2017: Jaitley may cut MAT along with lower corporate income tax

The extent of the cut in MAT’s rate will depend on the reduction in headline corporate income tax rate that the finance minister is expected to announce in the budget Gaurav  Finance Minister Arun Jaitley may lower the Minimum Alternate Tax (MAT) from the existing 18.5 percent in Budget 2017 as part of the government’s broad strategy to overhaul India’s corporate income tax structure that is beset with layers of exemptions and incentives. The extent of the cut in MAT’s rate will depend on the reduction in headline corporate income tax rate that Jaitley is expected to announce in the Budget. Corporate income tax rate is expected to be cut by 1.25-1.5 percentage points to 28.75-28.5 percent in the Budget 2017, but will likely remove a plethora of exemptions that allow companies to cut down on their effective tax payouts.

MAT is currently applied at a rate of 18.5 percent and goes up to 21.34 percent including cesses and surcharges. MAT was introduced in fiscal year 1998 to address inequity in taxation of Indian corporations. Many companies, despite making book profits as per their profit and loss account, were hardly paying any tax because income computed as per provisions of the Income-tax Act, was either nil, or insignificant. The Indian Income Tax Act contains a large number of exemptions from total income. Besides exemptions, there are several deductions permitted from gross total income.

The result of such exemptions, deductions, and other incentives under the Income Tax Act in the form of liberal rates of depreciation is the emergence of “Zero tax companies,” which inspite of having high book profit, are able to reduce their taxable income to nil. The system of MAT was accordingly introduced under which a company is required to pay a minimum tax of 18.5 percent of the book profit in case the tax on the total income computed under the normal provisions of law works out to less than this amount. In November 2015 the government had laid down a comprehensive roadmap for phasing out corporate tax exemptions by 2018 as it looks to reduce the tax rate, simplify the administration and improve India’s competitive edge globally. Tax deductions and exceptions have been prone to misuse and consequential litigation. Currently, there are 32 incentives applicable on corporate profits before calculating tax

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