Budget 2019: Govt may ask 'loss-making' companies to pay tax

More than 2.5 lakh companies, showing losses for several years to avoid paying income taxes, may finally come under the tax net now.

The finance ministry is likely to propose a minimum amount of tax on loss-making companies in the upcoming budget or just after that. However, genuine loss-bearing companies may redeem credit in the next 15 years, a highly placed finance ministry source told India Today.

This tax rate would not be as high as the current minimum alternative tax (MAT) rate of 18.5 per cent. "The tax rate may be less than the existing MAT rate of 18.5 per cent, but the government is considering some nominal tax," the finance ministry official said on condition of anonymity.

The government is actively considering some charges on companies that use resources such as paid-up capital and borrowing.

Companies report two sets of earning details - one under income tax and the other under Companies Act, 2013. But some companies make huge profits and pay dividends to shareholders under the Companies Act, and at the same time, show zero earning to avoid income tax. MAT was introduced to plug such loop-holes.

However, some companies are still out of MAT ambit as loss-making entities. The government is trying to bring them under the tax net now.

Tax experts said levying a nominal tax on such entities is a good idea, but it should not be as high as the existing MAT rate.

"There is no harm in having taxes on the use of the country's resources, but it should be nominal and not as high as the existing MAT rate," said Amarjit Chopra, former president of the Institute of Chartered Accountants of India.

MAT was implemented in India in 1983 as the "alternative minimum tax".

In 1987, it was replaced and changed with new provisions wherein if a company's profits were more than earnings computed under regular requirements of the Companies Act, it would have to pay at least 30 per cent of its book profit as tax. After restructuring in 1991, the government said there was no need to retain a minimum tax on companies.

But after five years, it was reintroduced in 1996 with the name 'Minimum Alternate Tax' (MAT). In 2001, MAT provisions were once again modified, and companies were to have the two-tax rate - the corporate tax and MAT - and had to pay the higher one. However, since 2001, MAT credit and carry forward provisions were dropped.

In 2005, the MAT credit and carry forward mechanism was reintroduced with a carry forward of five years, which has been extended over the years to 10 years, and currently it is 15 years.

Data shows that the MAT rate has gradually risen over the years in India. Industries said that such high 'minimum' tax provision is difficult for companies in a tough economic situation. Complex "book profit" calculation under MAT provisions has also been seen as a challenge for companies.

Loss-making companies, so far, have been exempted to pay any direct tax while using all resources and paying indirect taxes for several years. The government wants to levy a minimum tax on such loss-reporting companies with a provision of respite for genuine loss-bearers. It may support finance minister Nirmala Sitaraman and her team, struggling to balance government money and expenditure to fix fiscal deficit to some extent.

The newly elected 17th Lok Sabha will hold its first parliamentary session from June 17-26. On July 4, the government will put forth the Economic Survey for 2019-20, and the next day, the Budget will be presented.

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