Firms opting for lower tax regime can't adjust accumulated credits on MAT

Accumulated credits on minimum alternate tax (MAT) cannot be adjusted against their tax liabilities by companies opting for the newly announced lower corporation tax regime, said a source in the Central Board of Direct Taxes. 

Officials added the board would soon issue a circular on such clarifications in the newly announced tax regime, including those on MAT credit. MAT is currently levied at 18.5 per cent; after surcharges and cess, this is 21-22 per cent. The new structure has reduced the rate of MAT to 15 per cent, adding to a little over 17 per cent after cess and surcharges. Those opting for the new regime need not pay any MAT. 

On Friday, Finance Minister Nirmala Sitharaman had announced a new corporation taxation structure. This included a cut in the rate to 22 per cent from the prevailing 30 per cent for entities deciding not to avail of exemptions, such as tax holidays enjoyed by units in special economic zones or accelerated depreciation.

MAT views

On the MAT issue, Ketan Dalal, managing partner at tax consultancy Katalyst, avers: “Brought forward MAT credit is a vested right and should be allowed to be set-off. The quantum of set-off could be a matter of some debate but, in principle, denying this would not be fair or correct. There are judicial precedents to support this view.” 

MAT is levied on book profit, unlike normal corporation tax, which is levied on taxable profit. Due to various exemptions and deductions, some companies, particularly in the services sector, do not have taxable profit but do have book profit.

An expert says companies which have shown MAT credit as an asset in their account books will have to write it off if they go for the new corporation tax structure. 

If MAT credit is not adjusted, says Neeru Ahuja, partner at consultants Deloitte India, companies will have to do cost-benefit modelling for not only a year but a five to 10 years period, to assess whether they gain by opting for the new lower tax regime.  

Pallavi Joshi Bakhru, group head for taxation at metals major  Vedanta, says a word of confirmation from CBDT on the MAT set-off is needed to put the speculation to rest. "Yes, the way the ordinance reads currently, it is silent on the utilisation of MAT credits on moving into the new regime of corporate tax -- it states that there will be no MAT applicable," she observed.

Hitesh D Gajaria, partner and co-head of tax at consultants KPMG India, says it is hard to believe the tax authorities would deny carry-forward and set-off on accumulated MAT credits of companies if the latter opt to give up deductions and incentives and to instead be governed by the newly proposed lower tax regime. 

"This (not granting of credit) would go against the intent of the government – it does not find any mention, either in the press release or in the ordinance on cutting the corporation tax rate," he said. 

If the credit is denied, it is likely that citizens would feel betrayed and could challenge this in courts of law. "This is because the right to claim MAT credit gets crystallised the moment tax has been paid under MAT provisions," explains Gajaria.

The ordinance to cut the corporation tax rate has said MAT provisions will not apply to a company which has exercised the option for a lower rate of tax. However, it is indeed silent on set-off. Speculative scenarios are on among companies in this regard. For instance, that MAT credit might be adjusted against the entire tax on total income, which would result in accelerated set-off of MAT credit in the initial years. Or that the credit will be set-off in a tempered manner. 

Companies also want clarity on whether depreciation would be available under the new taxation structure and at what rate. 

There is also speculation that some companies might misuse the spirit of the provision on a lower tax regime by shifting their existing business to a new unit under a new company. Tax officials say any comapny doing so would be caught and be asked to explain the reasons.

Official offer

According to the official announcement last Friday, companies which are enjoying exemptions, tax holidays and the like, and are not willing to join the new tax regime for this reason, may choose to do so after the sunset clause on their tax breaks takes effect.  However, once they come to the new tax regime, they have to stay there.

For companies incorporated from next month and starting production before end-March 2023, there would be a reduction in the corporation tax rate from the present 25 per cent (with cess and surcharges 29.12 per cent) to 15 per cent (17.01 per cent with cess and surcharges) or about 12 percentage points.These companies also need not pay any MAT.

To also provide relief for companies which continue to avail of  exemptions and incentives, Sitharaman also announced the cut in MAT to 15 per cent, as explained earlier, from the current 18.5 per cent.