Minimum tax legislation and its effect on corporate financial reporting: A comparative analysis between US and India: a discussion

Abstract

In this study, the authors investigate imposing a minimum alternative tax (MAT) on Indian corporations during the 1996–1997 budget years. The authors have two objectives: to assess the new legislation's impact on tax revenue, and to determine how corporations responded to its imposition because of its explicit link to financial reporting. They first assess whether, on average, firms with low estimated tax rates before the imposition paid higher taxes after imposition and find, overall, that corporations paid, in total, a greater amount of their income in taxes. They also find that the largest firms in their sample experienced a smaller increase in their effective tax rates than smaller firms did. Next, they assess whether MAT-affected firms altered their financial statement reporting to reduce exposure to the MAT. Specifically, they assess whether a greater portion of MAT-affected firms changed their financial statement depreciation policies than non-MAT-affected firms. They report that, for their sample, a significant number of MAT-affected firms increased their depreciation rate after MAT imposition. The proportion of non-MAT-affected firms changing depreciation rates after imposition was not significant. They also partition MAT- and non-MAT-affected firms on increasing or decreasing book profit and find that MAT-affected firms made proportionally more changes. The authors conclude that the MAT appeared to have increased horizontal equity among taxpayers in India, but its tax revenue enhancement potential is limited by its scope, limited applicability, and avoidance behavior by affected corporations. My comments are directed at what I perceive to be motivational and methodological issues in the paper and the conclusions we can draw from the current representation.