NEGATIVE reactions to the minimum alternate tax (MAT) on zero-tax companies have been immediate with the BSE Sensex shedding 142 points on July 23 and 81 more the next day.
And it wasn't the bourses alone who were up in arms. Companies which had till now been enjoying tax immunity on their export earnings put tremendous pressure on Commerce Minister B.B. Ramaiah, who has now promised to place a consolidated paper on the impact of the Budget on exporters before the finance minister. Others find the very principle of MAT unacceptable. Currently, there are 1,474 zero-tax companies, or companies which, due to smart tax planning, are able to utilise the 148 tax breaks available to corporates and thus pay no tax at all. They include blue chips like SAIL, SBI, Reliance, Essar Steel, Bombay Dyeing, Arvind Mills and Ashok Leyland. Industry believes that these firms are being penalised for being efficient in managing their finances. Also, says Ajay Shriram, vice-chairman and managing director, DCM Shriram Consolidated Industries: "MAT is not positive in terms of reinvestment by a company. Most companies that were under the zero tax banner used the surplus funds to benefit the company."
Now a zero-tax company will have to shell out 12.9 per cent of its book profits to the Government as MAT. The finance minister expects to raise Rs 912 crore this way, though his Revenue Secretary gives a more optimistic estimate: Rs 1,600-Rs 1,800 crore. Outlook's estimate is, however, around the Rs 1,200-crore mark. "But," says Alok Vajpeyi, director, BZW Asia, "the introduction of MAT will more or less offset the reduction of surcharge on corporate tax from 15 per cent to 7.5 per cent, so corporate tax revenue is likely to remain at 1.4 per cent of GDP."
Chidambaram has reacted to industry's ire by saying that the outcry over MAT is due to ignorance. But the point remains that companies, whose book profits from exports exceed 70 per cent—but are not 100 per cent export-oriented units (EOUs) or set up in export processing zones (EPZs), which are exempt from MAT—will now end up paying taxes on their export earnings. But those whose export earnings provide for less than 70 per cent of book profits won't pay any extra tax. Chidambaram has offered a simple solution to over-70-per-cent companies: declare yourselves as 100 per cent EOUs.
But tax experts are of the opinion that a law like this will compel companies to either hide their export earnings so they don't cross the 70 per cent barrier, or hive off export divisions into separate companies. Clearly though, the wheel has come full circle. As commerce minister, Chidambaram had stoutly defended the tax breaks for the exporting community. He even went on record saying: "I don't think exporters are pampered. Income-tax exemption is the only non-discretionary incentive we give them." His priorities are different now.
