Along with a likely 2-percentage-point cut in the corporate tax rate in the FY18 Budget, the government may also make a similar reduction in minimum alternative tax (MAT) rate to keep the differential tax treatment intact for zero-tax firms, sources said, reports Prasanta Sahu in New Delhi.
Also, there could be some change in MAT rules for computation of book profits (on which the tax is applied) in view of the implementation of new accounting standard — Ind-AS — by a large number of firms from April 1, they said. The idea is to ensure that the MAT liability of firms doesn’t inflate as a result of the notional increase in book values arising out of fair-value accounting.
While the average effective rate of tax on corporate income is around 23%, much lower than the marginal rate of 30%, MAT serves as a threshold below which the tax incidence on profit-making firms can’t fall. The revenue forgone on corporate tax incentives stood at R1.06 lakh crore in FY16.
This was partly offset by the revenue from MAT of R46,510 crore. MAT is currently applied at a rate of 18.5% and including surcharge and cesses, it goes up to 21.34% in case of Indian companies and 20% in case of foreign companies. Currently, an Indian firm attracts 30% corporate tax rate, which adds up to 34.6% with surcharge and cesses. MAT is levied on companies that show book profits and declare dividends to shareholders but don’t pay any income tax as their earnings under provisions of income tax rules were either nil or insignificant thanks to various tax incentives availed.
In Budget FY16, finance minister Arun Jaitley announced a plan to reduce the corporate tax rate from 30% to 25% in four years. In the subsequent year, he cut the rate to 29% for those companies which reported total turnover/gross receipts up to R5 crore in FY15 and to 25% for newly incorporated domestic companies. Industry, which has expecting a rate reduction for all of corporate India and a clear roadmap for the move towards the 25% rate accompanied by withdrawal of various exemptions, was rather disappointed. As per the blueprint, all tax corporate incentives for which no end date have been specified in the law will be phased out from April 1, 2017.
“India has to reduce its corporate tax rate to a lower mark-up because many countries including Singapore, the UK, Sri Lanka, Vietnam and even the US have either lower rates than us or are have announced plans to rates to below 20%. There is a global pressure (on India to reduce tax rate on companies),” said Sanjay Kumar, senior director at Deloitte India. In that scenario, the MAT rate also would also need to be cut by the same margin to keep the tax differential intact as a large number of companies pay this alternative tax instead of normal corporate tax, Kumar added.
After the introduction of Ind-AS for all companies with a net worth equal to or above R500 crore from the start of this financial year, many firms have seen their MAT liability increase by 10-20%. The new globally compliant accounting norm will be extended to unlisted firms with a net worth of R250 crore or above and all listed firms from April 1, 2017. “As a result of transition to Ind-AS, certain adjustments would be required to be made by the companies including adjustment in the opening values which may have significant impact on the computation of book profits for MAT purposes,” said Gaurav Karnik, tax partner, EY India.