MAT- taxing incentives through the back door

Posted: Friday, Mar 03, 2006 at 0000 hrs IST
Updated: Friday, Mar 03, 2006 at 0000 hrs IST

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: The finance minister has proposed certain changes in the Minimum Alternate Tax (MAT) provisions. The most prominent being an increase in the MAT rate to 10%. In addition, the income arising from long term capital gains from security transactions, which are exempt under the normal tax provisions, will need to be included in computing the book profits of a company. The credit period under which MAT can be offset against regular taxes has been increased from five to seven years.

The increase in the MAT rate has been justified on the grounds of bridging the gap between the corporate tax and the MAT rates. This appears hard to justify in circumstances where income is exempt under the regular income tax provisions but is included in arriving at the book profits for MAT purposes.

On the one hand, the Government provides tax incentives for specified activities and under the same legislation it seeks to tax a part of the same income through MAT.

The more serious concern around the proposed amendments in the MAT provisions pertains to the inclusion of specified long term capital gains income in computing the book profits. Here, long term capital gains, although exempt under the normal tax provisions, would be taxable under the MAT route. To make matters worse, the benefits of indexing the cost of acquisition that were earlier available when capital gains were not exempt would no longer be allowed in computing the MAT liability.

Extract of the explanatory memorandum

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