Proposed changes in MAT - much noise over largely inconsequential proposals

In accordance with the new bill proposed on the existing MAT, certain amendments have been recommended. MAT would still be calculated on book profits and not on gross assets, as proposed. However, it has been raised from existing 18% to 20%, inclusive of surcharge and cess. This increase in MAT was disclosed amongst a plethora of mixed feelings. The proposed MAT hike increase would result in negative implications on companies with longer and heavier capex cycles specially Infrastructure, Power, IT and Pharmaceutical companies as the increase in MAT rates was not expected.

The infrastructure companies have a long gestation period; a high tax increases the cost of these projects and may make them unviable in many cases. The same is the case with Pharma and Healthcare companies undertaking hospital projects. It would negatively impact the profitability of merchant power plants where costs are not a pass through. The auto ancillaries, hotel and tourism companies paying low taxes will now have to part with more cash. On the positive side, this 2% hike will be nullified with the removal of surcharge and cess from MAT. In fact, the system of surcharge and cess has been eliminated as a whole. The corporate tax which was earlier at 30% exclusive of surcharge and cess will now be computed at 30% inclusive of surcharge and cess. As a result more and more companies will now start paying MAT as the rate differential between it and corporate tax has narrowed down. Moreover, MAT is creditable against corporate tax that can be carried forward for 15 years as per new provisions. The tax credit earned by it shall be an amount which is the difference between the amount payable under MAT and the regular tax i.e. tax on the basis of normal computation of total income. MAT credit will be allowed carry forward facility for a period of fifteen assessment years immediately succeeding the assessment year in which MAT is paid. The unabsorbed MAT credit will be allowed to be accumulated subject to the fifteen year carry forward limit. In the assessment year when regular tax becomes payable, the difference between the regular tax and the tax computed under MAT for that year will be set off against the MAT credit available and this credit allowed will not bear any interest.

We see new MAT provisions as a positive step towards simplifying the direct tax regime in the country however; the rates are higher than expectations. Also, the proposed changes come into effect only in April 2012. Given the rather soft and re-conciliatory stand adopted by the government so far, further changes made to the proposed draft to make the final policy nearly indistinguishable from the existing structure will not surprise anyone.

Other DTC Provisions:
According to the new DTC Bill, effective from April 2012, first returns are to be filed after 31 March, 2013. The short-term capital gains would be taxed at 50% of the income tax rates as per the revised slabs and short-term capital gains for companies will be flat 30%. According to the bill a dividend distribution tax of 5% for both equity mutual funds (MFs) and unit linked insurance policies (ULIPs) will be levied. The dividend distribution tax to be levied on the companies will remain same i.e.15%. MNCs will be taxed in a similar way as the domestic companies. In case of foreign companies, they will be charged a branch profit tax. This is similar to the DDT levied on domestic companies. The special economic zone (SEZs) will be allowed profit linked tax deduction under DTC. Also SEZs notified as on March 31, 2012 will get tax break and that started by March 2014 will get also get tax subsidy. From the capital market point of view these measures are positive because of reduction in short term capital gains on equity investments for small investors. Long term capital gains tax stays abolished and marginal introduction of DDT will not offset the other advantages which investors have got.