A case for MAT and CSR levies on imports
Sec 135 of the Companies Act 2013, enjoins companies meeting some criteria to spend at least 2 % of their average (of preceding 3 years) PAT on social projects. These thresholds are quite low, less than a $ million in PAT or $ 150 million in Sales or less than half that in Networth. As the table shows the PAT of just the listed firms would have had to spend an estimated Rs 4000 cr on CSR using 2016-17 as surrogate for the base PAT. The actual spends reported on CSR by all firms (listed or otherwise) are about Rs 8500 Crores in 2016 as per MCA website.
Sec 115JB of the Income tax act specifies a Minimum Alternate Tax (which now comes to an effective 21.55% of PAT) The objective of introduction of MAT is to bring into the tax net “zero tax companies” which in spite of having earned substantial book profits and having paid handsome dividends, do not pay any tax due to various tax concessions and incentives provided under the Income-tax Law. MAT is in its 3rd avatar: after 2 attempts in 1980s (both American style of deeming certain % as minimum income to be offered for income tax, irrespective of tax shields) it was reintroduced in 1996-97 and has steadily grown in its significance nullifying several other incentives offered.
It should be noted that of the relevant competing countries for our markets – ASEAN, Japan, S Korea and China – very few have an equivalent tax. None of the ASEAN has anything as draconian as ours. Philippines and Cambodia have MATs (titles Minimum Corporate Income Tax MCIT for short) at 2 and 1% of turnover and Malaysia in a facilitative not extractive (purpose is to do away with procedures and elaborate book keeping etc) way has a minimum Tax on Labuan Offshore entities at 3%. Only S Korea has anything that comes close to India’s but the rates are 10-17% depending on size of profits (17% kicks in at an equivalent of about $ 100 million) and SMEs suffer 7%. All very low compared to India. Most of these economies offer various incentives for investment, trade and business promotion, export promotion, employment creation, development of less developed areas, etc. But none of these including incentives including on exports are offset by a levy like MAT.
India’s MAT design and the rate have more or less nullified all the incentives. In fact, Japan had protested strongly against MAT before and in 2014 praying for at least Japanese companies operating in India to be exempt from MAT. What one policy and goal of government offers the other policy seeks to nullify that too within the same Act – great policy making indeed!
As its stands our investment incentives are neither focused nor competitive. The cash outflows from both CSR and MAT are peculiar to entities and manufacturers operating within India. However, if the same Indian market is accessed from outside India, the entities behind them suffer no such levies or cash outflows. The ASEAN agreement has reached a stage of fruition and in many segments India has seen steep increases in net imports into India due to inherent cost competitiveness. There are other free trade agreements in various stages of reaching peak effectiveness and newer ones are being negotiated.
As our imports grow – as of now there are signs that this will not abate anytime soon- the base on which the Government can collect MAT and CSR (or cause to spend in activities it directs) will shrink in relative terms if not in absolute terms.
Estimates of Loss: The PAT margins on India’s listed enterprises excluding government entities and finance sector is about 6.5%. Our imports excluding oil, gold, semi-precious stones (which are largely for re-exports) and defence, are about $ 200-210 billion. The estimated (at the same rate as ours) PAT margins on this is about $ 3.2 billion and the MAT and CSR that would have accrued to the government /welfare spends is about Rs 21,700 Crore. (Pl see table attached).
On deemed profits on imports this would translate to about 1.54% of import values. An equivalent levy should be imposed and recovered on imports. Imagine an addition of this to the existing margins of 6.4% – it can make a huge difference.
Sure similar entities suffer income tax levies in their home countries. But it is also important to remember that almost all countries provide exemption or even incentives for boosting exports and hence don’t suffer MAT or normal taxes. In several of these countries profits of units located in SEZs is exempt for long periods. And profits on specified products and units (depending on focus products and areas) are exempt for varying lengths of time some extending to 20 years.
MAT and CSR are a net differential on our imports and hence a source of competitive advantage for them. Domestic producers are to that extent at a disadvantage, since their profits are taxed at least at MAT. The government has to study all additional obligations on Indian companies and either impose similar obligations on imports or recover through compensatory mechanisms and create funds and spend on targeted activities.
Indian infrastructure is a huge drag on domestic firms; at least the additional levies should be neutralized.