Minimum Alternate Tax (MAT) is a tax levied on book profits, the profits which are made but not realized through a transaction. According to one of the sections of IT Act, if the income tax payable by any company on its taxable income is less than 18.5% of its book profits then the company needs to pay MAT at 18.5%. This tax was introduced to bring the zero tax companies and the companies paying marginal tax in the tax bracket. Even the companies whose tax liability is actually less than 18.5% due to incentives and deductions have to pay MAT.
What is the current controversy on MAT?
The IT department has sent notices to 68 Foreign Portfolio Investors (FPI) demanding Rs 608 crores as MAT. For domestic or foreign investors MAT will be levied on the capital gains accruing to them from sales of shares. FPIs are contending against MAT on their profits since they do not have any place of business in India and hence are not required to maintain any account books in India. FPIs have also argued that MAT was introduced for domestic companies to neutralize the effect of tax incentives, but as FPIs do not avail any tax benefits, MAT provisions should not be applied to them.
Although in his budget proposals finance minister has given relief to FPIs and capital gains accruing to FPIs have been exempted from levy of MAT but the provision will be applicable from 1st April 2015. But the dispute on tax liabilities arising from previous years remain. This dispute on retrospective MAT has to be decided by Supreme Court. Another challenge for FPIs is that since they would have already distributed the profits from previous years to investors, it will be difficult for them to recover funds to meet MAT liability.
What is government doing about retrospective MAT?
To calm the markets and foreign investors, government has decided to refer the matter of retrospective MAT to a committee and till it submits the report on applicability of MAT revenue department will not act on tax demands.
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