The economics behind direct taxation is twofold:
i. Collection of revenue for the State in a manner to reduce the inequality in the distribution of wealth, and
ii. Using it as a fiscal tool for channelisation of the economy into desired sectors.
The first objective is achieved by enacting the Direct Taxes Laws and empowering the State to alter the tax rates annually while preparing the Budget for the ensuing financial year. The second objective is achieved by providing various tax incentives in the form of tax holiday (deduction or exemption), accelerated depreciation, etc. Needless to mention that various tax incentives provided by the Income-tax Act, 1961 (‘the Act’) have contributed to a large extent in the development of the Indian economy to bring it to its present state.
The above two objectives are conflicting with each other, in a way. Hence a proper balance has to be maintained between the two. But this is often lost sight of by the law-makers.
A typical example is levy of Minimum Alternate Tax (MAT) on book profits of companies. MAT was introduced for the first time in India u/s.115J by the Finance Act, 1987 and later removed, reintroduced and amended from time to time. This article is intended to raise a basic question whether levy of MAT is at all justified in the light of the second objective stated above.
The advocates of MAT basically give the argument that corporates should not be allowed to have two faces — one for the shareholders and the other for the State. In simple words, when they have huge profits in books of account but no or lesser ‘total income’ under ‘the Act’, they should pay MAT. But then, how did the corporates have no or lesser ‘total income’ under ‘the Act’? It was only because of tax incentives given by the State. For example, a company engaged in development of infrastructure facility is allowed a 100% deduction of profits derived from such business for a period of 10 consecutive years out of a total period of 20 years. Now assuming that it is the sole business of the company, its ‘total income’ under ‘the Act’ shall be nil (subject of course to the enormous litigation on the word ‘derived from’) but will have a positive book profits, on which it has to pay MAT @ 18%. It indirectly implies that deduction allowed u/s.80IA becomes only 40%. This result could have been achieved by simply amending section 80IA and restricting the deduction to 40% (Tax on 60% of the profits @ 30% is nothing but MAT of 18% on 100% profits). The same situation can be visualised in several other tax incentives like:
i. Deduction u/s.80IB to u/s.80IE
ii. Deduction u/s.10A, u/s.10B & u/s.10AA
iii. Additional depreciation @ 20% for new machineries (for manufacturers)
iv. Allowance of capital cost u/s.35AD for eligible business (obviously in books, these exp. will be capitalised giving rise to huge difference between book profits and total income)
v. Weighted deduction of 175% or 200% for R&D
vi. LTCG u/s.10(38) [when it is said that exemption u/s.10(38) is in lien of STT, where comes the need for MAT on such LTCG for corporates, as if they don’t pay STT?]
vii. Exemption u/s.54EC or u/s.54D or u/s.54G or u/s.54GA.
viii. Subsequent deduction u/s.40(a)(ia) or u/s.43B because of late compliance.
If the above situations are to be taxed anyway, then those sections themselves can be amended or deleted. No doubt, MAT credit is allowed to be carried forward u/s.115JAA; but its utilisation in future is subject to many contingencies and restrictions and we accountants are well aware of the time value of money.
We must debate on the question whether it is justified to levy MAT on book profits especially on tax incentives like 10AA or 80IA, etc.? I believe, it is a violation of the principle of ‘Promissory Estoppel’ ! ! !
