MAT firms face advance tax heat

CBDT scanner on quarterly results.

The Central Board of Direct Taxes (CBDT) will focus on companies that are in the minimum alternative tax (MAT) ambit to increase advance tax collection.

In its plan for this fiscal year, the CBDT has decided to "persuade" the MAT-paying companies to pay the tax in advance instead of doing so at the time of filing annual returns.

Tax authorities will also examine the quarterly financial statements of large and medium companies each time advance taxes are collected. In the restructured method for advance tax collection, tax deducted at source and the procedure for scrutiny assessment have been revamped. Normally, financial statements are assessed by tax authorities during the final assessment of income at the end of a financial year.

There are over 200 MAT-paying companies, including Reliance Industries, Essar Steel and Jindal Vijaynagar Steel. Advance tax on MAT is a contentious issue. Since companies cannot estimate the book profit (on which MAT is paid) in advance, they normally do not pay it in advance even though they are required to do so.

"While advance tax estimation itself is difficult under normal tax provisions, the estimation of the book profit, which involves a projected profit-and-loss account for the year, is even more difficult. To that extent, corporations are reluctant to make an estimate of the book profit and pay MAT pay in advance," said Ketan Dalal, senior partner, RSM & Co.

In case of any shortfall in payment of advance tax, under Section 234 (B) of the Income Tax Act, 1961, corporations are required to pay interest at a rate of 1 per cent per month on the shortfall. In any case, 90 per cent of the total liability of a company need to be paid in advance. Any shortfall in this attracts a 12 per cent annual interest from the beginning of a financial year.

CBDT is also asking taxmen to closely monitor exporters who were earlier enjoying tax exemption on their profits. Out of the total tax collection target of Rs 1,76,812 crore in 2005-06, it is estimated that Rs 57,723 crore will be collected from Mumbai.

Local authorities will now come under the scrutiny of tax authorities if municipal bodies, universities, educational institutions, hospitals, nursing homes and institutions for rehabilitation of patients file returns above Rs 10 crore in major metros and Rs 5 crore in other cities. Scrutiny assessment refers to detailed investigation of returns filed compared with the simple verification process under normal assessment.

CBDT has also enhanced the purview of tax deductible at source (TDS), which accounts for almost 35 per cent of the direct tax revenue. Some of the areas that will be under closer scrutiny are loss-making companies, which have defaulted on TDS on account of lack of funds, and media companies paying commission to advertising agencies.

The authorities will also scrutinise payments made by banks for professional services in the recovery of bad debts, credit verification and loan processing, as well as payment of interest on term deposits maintained by banks as margins for issuance of guarantees, not to mention companies outsourcing a significant portion of their operations.

As per the central plan, the board has decided to increase the number of new assessees by 15 per cent annually.