New Delhi, January 18, 2017

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.

[The Financial Express]