THE minimum alternate tax ( MAT ) on corporate profits introduced last year is accused of bringing about an industrial slowdown. Industry complains that since the provision for MAT had to be made from the reserves, it has killed expansion- diversification plans. It also discourages exporters by nullifying the tax break for export income.
Tax experts agree that MAT is an effective, interim measure to make tax- evading corporates pay their share. But some economists, led by Prof. Indira Rajaraman of the NIPFP , argue that a tax on book profits neither manages to cap evasion nor promote fiscal equity. Instead, they suggest an asset- based MAT on the lines of those in the developing Latin American countries, for two reasons. Physical assets are more difficult to under- report. And it is a necessary back-stop when the administration is unable to enforce the regular tax by detecting sophisticated accounts- based evasion.
Rajaraman prescribes a 1.6 per cent levy on total assets, applying a 40 per cent nominal tax rate (excluding surcharge) to a 4 per cent minimum rate of return, with profits above the minimum taxed at the current 46 per cent rate. This would result in an 89 per cent rise in corporate tax revenues (77 per cent if export income is waived) or at least Rs 10,000 crore.
But an asset- based tax is less effective in raising revenue than in promoting corporate efficiency and optimal capacity use. In India, while it can check the needless expansion promoted by the tax breaks, it would be an unfair levy on sick companies, though it may put a stop to companies going sick due to neglect or siphoning of funds. Also, MAT on total assets, which include debt, double- tax intercorporate debt. Which is why some countries kept the financial sector out of MAT or levied a lower duty. In India, the problem is compounded because the financial sector does not enjoy tax concessions. Despite strong lobbying, the direct tax committee is undecided on recommending an asset- based tax.