The income tax department has still not found a suitable replacement for the minimum alternate tax, despite having tried to replace the levy on a couple of occasions.

MAT is levied at the rate of 7.5 per cent on the total income of the company, under section 115JB of the Income Tax Act, 1961, on zero-tax companies.

These tax exemptions include those for backward areas and specified sectors. Based on these exemptions from their income stream, companies are able to show their income tax liability is less than 7.5 per cent of their book profit.

In such cases, the Central Board of Direct Taxes treats their total book profit as their income. The corporate tax rate on other companies is 36.75 per cent.

Under the section, the CBDT defines book profit as "the net profit as shown in the profit and loss accounts of the company, raised by the income tax dues, dividends, set aside for reserves and any expenditure related to any income from any tax exemption schemes."

The Kelkar task force on direct taxes had proposed abolition of MAT, along with reduction in corporate tax rates to 30 per cent. It had said this would not lead to a loss of revenue as the various sectoral and backward area tax concessions should also be reduced  substantially.

However, the earlier Parthasarathi Shome committee on tax policy and tax administration for the Tenth Plan, had recommended that MAT should continue.

It had argued that instead, the base of the tax should be changed from book profit to a combination of net worth and dividend, distributed as a better means to tap the income generated by the companies.

The Parthasarathi Shome report had therefore said that MAT should be levied on 0.75 per cent of the adjusted net worth of a company plus 10 per cent of the dividend distributed. Accordingly, it had also said there was no need for imposing a dividend distribution tax on companies.

Following the report of the two expert groups, the CBDT had set up an internal group to come up with a specific tax proposal on MAT for the Budget of 2003-04.

But as the industry-based tax exemptions have continued, the department found that it was unable to delete the provisions.

Of the total corporate tax collections of Rs 62,986 crore (Rs 629.86 billion) for fiscal 2003-04, MAT accounts for almost a quarter. The tax was introduced in the Budget of 1987, repealed in 1990 and again re-introduced in 1996.