Budget 2017 is likely to kick off a phase-out of Minimum Alternate Tax

Rate may come down in FY18 and is likely to be scrapped over 3-4 years

The Union Budget is expected to provide relief to companies which come under the minimum alternate tax (MAT). Sources who attended a presentation made by the finance ministry last month said the current tax framework has made MAT a redundant levy.

"While the government has already promised to lower the corporation tax rate further, it has also started work on ending tax rebates and tax holidays for companies. If foreign institutions can be exempt from such a tax, even domestic companies should get a similar benefit,” the sources said.

The reducing gap between corporation tax and MAT is one of the main reasons for the government to consider such a step. While the current MAT rate is 18.5%, corporation taxes have come down to 29% from 35% earlier. And this gap will narrow further as the government has promised to bring the tax down to 25% by 2019.

Punit Shah, partner, Dhruva Advisors, said according to the road map laid down by the government, the corporation tax rates may be reduced alongwith phaseout of exemptions and incentives. "The logical corollary would be that MAT would become redundant. It should be possible to reduce MAT rate immediately and phase it out completely over a period of three to four years,” he said .

There are other arguments favouring doing away with MAT. “Taxes like MAT could have negative impact on companies especially start-ups who are in an investment mode. The gestation period for profits in these companies is usually long. And once they make profit, they could be subjected to MAT. The full amount of losses incurred in the previous period cannot be completely set off,” Riaz Thingna, director, Grant Thornton Advisory.

The other proposals under consideration include reduction of the MAT rate to 7.5% and allow companies to set-off other taxes using MAT credits. 

Earlier MAT was applicable to both Indian and foreign companies. However, it is applicable only to domestic companies, at present. In 2014, this issue had come under focus, when the tax authorities sent notices to various foreign portfolio investors (FPIs) demanding MAT on the capital gains they had made from Indian operations. Subsequently, the government had withdrawn the levy of MAT for FPIs and foreign companies who don’t have any permanent establishment in India. 

MAT was introduced by the government to check practices that allowed companies with substantial income to escape the tax net. This was possible on account of various exclusions like dividend payouts and credits availed through tax incentive schemes. Although MAT was first introduced in 1987, it was subsequently scrapped. However, the provision was soon reintroduced in 1997. During the time, the rate for MAT was fixed at 12.5% of the total book profit.