Re-measure deferred tax assets, liabilities for tax rate changes: EY India

Following the changes in the corporation tax regime among the key concerns raised by businesses relates to impact of MAT on their financial. Pranav Sayta, national leader, international tax and transaction services, EY India and Jigar Parikh, partner, financial accounting advisory services, EY India, de-fog some of issues raised by Corporate India.

My company has a large amount of MAT credit on account of two units claiming tax holidays/ incentives.  From next year the tax holiday period ends and the profits from these two units should be applicable to regular corporate taxes. We have undertaken a brief modelling exercise and expect to recoup MAT credits in the next 4 years against regular income tax payable.  Can I opt for the concessional tax rate five years from now? If yes, could Indian tax authorities invoke GAAR provisions?

You may not be wrong to model the benefit of MAT credit and claim the concessional tax rate in a later year. The new ordinance (read with the CBDT clarification) provides taxpayers the option to either choose the concessional tax rate (without tax holidays and MAT credit) or continue paying corporate taxes at 34.94 per cent along with availing tax holidays and MAT credit, if any.  

In fact, the CBDT clarification provides taxpayers the option to utilise MAT credit before opting for the concessional corporate tax rate.  Also, under GAAR, the taxpayer is accorded the choice to implement a particular transaction from an income-tax standpoint. Therefore, in both cases (that is, opting to not exercise the option for concessional corporate tax rate in Year 1, and selecting a particular year in the future), it is unlikely that the Indian tax authorities would seek to invoke GAAR provisions.  

What should be the ideal year to opt for the concessional tax rate in case a company has MAT credit balance, but from FY2019-20 onwards the company is likely to pay taxes under normal provisions?

If the company has a large unutilised MAT credit balance, it may be better to not opt for the concessional corporate tax rate. Opting to be governed by the erstwhile 34.94 per cent tax rate regime provides the company with the option to utilise the MAT credit against regular corporate taxes payable.  

CBDT has clarified that MAT credit benefit will not be available If company opts for concessional tax regime (CTR). What will be the impact on such non-availability of MAT credit on the financial statements if company opts for concessional tax regime?

MAT credit is recognised as deferred tax asset in the financial statement. If company opts for CTR, MAT credit will no longer be available and will not meet the definition of asset. Hence, companies which opt for CTR, deferred tax asset recognised for MAT credit will need to be de-recognised. Such reversal of deferred tax asset will be charged as expense to the profit and loss account. Companies also need to re-measure their existing deferred tax assets and liabilities for tax rate changes.

For companies having net deferred tax liabilities, such re-measurement may result into potential gain which may off-set loss on MAT credit write-off. Net impact will have effect on profit after tax (PAT) and earnings per share (EPS) of a company.

If a company continues paying normal taxes and intends to go for concessional tax regimes after certain period (say 2-3 years), what should be the treatment of MAT credit asset recognised?

MAT credit is recognised as a deferred tax asset and requires companies to estimate whether it will be realised during the timeframe when a company is in the normal tax regime, that is, within two-three years. Assessment of realisation of MAT credit needs to be done in the period the company is committed to avail concessional tax rate.

To the extent company estimates that certain amount of MAT credit will be realised, it will continue as a MAT credit asset. However, company will de-recognise the MAT credit to the extent it estimates such MAT credit will not be realise in the period it remains in normal tax. Such de-recognition will result in tax expense in the profit and loss account.