ET in the classroom

SOME TERMS YOU NEED TO KNOW WHEN THE FM PRESENTS THE BUDGET ON FEBRUARY 26


Minimum Alternate Tax (Mat)
Indian companies pay 30% tax on its profits as per the Income-Tax Act. But, tax holidays announced from time to time may result in much lower tax outgo for India Inc. If a company’s tax liability is less than 10% of its profits, the company has to pay a minimum alternate tax of 15% of the book profit. This provision is expected to change when the proposals of the direct taxes code (read the entry below) are accepted. Instead of levying tax on its book profit, the code proposes a MAT on gross assets of a company.


Value-Added Tax
State governments levy this on goods at point of sale, based on the difference between the value of the output and the value of inputs used to produce it. The aim here is to tax a firm only for the value it adds to the manufacturing inputs, and not the entire input cost. Thus, VAT helps avoid a cascading of taxes as a product passes through different stages of production/value addition.


GST
The GST, or goods and services tax, contains all the indirect taxes levied on goods — including central and a state-level taxes. This tax is expected to simplify and streamline the indirect tax regime. It will be an improvement on the value-added tax system as it will incorporate central excise duty and service tax along with state taxes. A uniform GST across the country is expected to create a seamless national market. For the taxpayer, it will mean less paperwork and could actually translate into a lower tax burden, as it would remove distortions from the system.


Direct Tax Code
The Income Tax Act came into effect nearly half a century ago. Since then, the economy has undergone a complete transformation with new kinds of business and activities coming up. To make the tax laws reflect these changes, the government has now come up with the Direct Taxes Code. It proposes to simplify the tax laws, includes a new way to calculate taxes on income, has fixed tax rates and also lays out comprehensive guidelines on international taxation. The Code is scheduled to replace the existing Act from April 1, 2011.

Ref: Economic Times, Delhi ,10th February 2010