Minimum Alternate Tax: Should India enforce it?

Minimum Alternate Tax: Should India enforce it?

Introduction:

Minimum Alternate Tax was initially introduced for the companies which are more likely to be apt for Alternate Minimum Tax which is also applicable to every individual taxpayers. It was observed that the companies used to disclose their boosted profits in the accounts which are laid in the annual general meeting in order to encourage the shareholders while on the other hand they show nil or little more than nil profit to avoid to pay or pay less part of the income tax. Hence they periodically conceal their income.

Here the variation occurs due to adaptation of different policies and methods of policy due to profit as per Companies Act and as per Income Tax Act.

Thus, Minimum Alternate Tax was introduced by the law makers to prevent these kind of undue contraction in tax and bring such companies under the tax provisions according to which corporate entity has to pay minimum tax and the ones who conceal their profit need to pay penalty. Its clause and provisions are laid under section 115JB of Income Tax Act, 1961. Thus Indian concept of such tax only applies to corporate profits. Let’s go through the reasons, why India isn’t enforcing Minimum Alternate Tax for all.

Yes:

1. India should enforce Minimum Alternate tax to increase public revenue which will consequently lead to reduction in other government deficit which generally arises due to more public expenditure over public revenue. Hence MAT would be better as another source of revenue for government payable as a part of individual income also.

2. Such kind of deficiency is usually met by the measure of public debts of borrowings by the foreign company. And a higher rate of interest is paid for these foreign borrowings, which externally leads to increase in public expenditure. Thus, it generates another burden of repaying the debt with higher rate of interest.

3. Alternate Tax is introduced to prevent taxpayers from concealing the corporate profits. This kind of concealment could also happen in case of individual’s personal profit. If MAT will be enforced for individuals also, then there will be no option left with general public to conceal their personal income.

4. Similarly it should also be enforced to foreign companies who invest in India or trade with other companies. As they are investing in India and making profits out of it, they should pay the part of these profit as MAT which is being extracted from India’s economy and not any of the external activities. Sometimes they make supernormal profits, a part of which should be paid to the host country.

5. It could be an opportunity for Indian government to raise fund from these foreign investors. Last month Indian Finance Minister Arun Jaitley presented the pre-estimated tax demand on foreign investors which amounts to approximately more than $6 billion which could be raised through MAT.

No:

1. The view to enforce Minimum Alternate Tax even for foreign investors and personal earnings is not at all good. India needs to maintain the confidence which directly appeals to foreign investors. Indeed they are extracting these profits from Indian economy, but at the same time it proportionately amounts to India’s development and growth as it gives rise to Gross Domestic Product (GDP) of the country.

2. Minimum Alternate Tax shouldn’t be imposed to foreign companies who are coming to India and investing in its economy. It is extremely a good thing that they are making India’s available resources productive, which will rather go wasted if they will not utilize it for production of some goods or services. The goods and services they provide are of good quality and are beneficial to Indian consumers. Such investments are more important than tax on profits.

3. Indian economy is labour intensive rather than capital intensive. Hence, in India labour is available in wide range but there is relatively a lack of advance and improved technology which is fulfilled through opening the economy to foreigners for investment. And enforcing of Minimum Alternate Tax may dissuade them from such activities. They may divert their funds to other Asian markets.

4. It was initially introduced for those corporate sectors who used to actively conceal their profits for the purpose of income tax. It is nothing to do with foreign investors as there is no provision for applicability of MAT to foreign companies. Apart from this, these foreign companies also helps in generating employment to Indians which ultimately leads to decrease in unemployment rate.

Conclusion:

The tax policy of Minimum Alternate Tax will demotivate the foreign investors as it demands additional 20% on long term capital gains also apart from 15% short term capital gains. This doesn’t seem to be a good step and could result to mistrust as PM Narendra Modi has earlier announced openness to the foreign companies and now another step to implement MAT may result in economic loss.

It doesn’t have any provision for taxation that do apply to international funds before. The implementation of such law may cause certain economic damage to the country resulting from downfall in annual productivity of the country to loss of those available resources which can’t be utilized with obsolete and old technologies. It should be consistent with its provisions strictly to corporate sectors rather than enforcing it to foreign companies.