Corporate tax cuts: No MAT credit under new regime

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Updated: October 3, 2019 7:05:45 AM

CBDT circular may prompt a cross-section of India Inc to remain in the old tax regime

Corporate tax reliefs, alternate tax credit, MAT credit, CBDT, SEZ, MAT revenue, Deloitte IndiaAs for firms already paying MAT, which include many IT firms and those in the SEZs, the Wednesday’s CBDT circular won’t make any difference.

A sizeable cross-section of Corporate India will likely opt out of the regime of 22% headline tax rate, as the government on Wednesday made it clear that those switching to the new dispensation can’t avail of their accumulated minimum alternate tax (MAT) credit.

Companies taking MAT credits as assets will have to now write these off and take a big hit on profits if they adopt the new regime, negating the recent tax cuts’ purpose of boosting the cash flows of firms and encouraging them to invest.
According to tax experts, the companies to be hit by the latest Central Board of Direct Taxes (CBDT) circular are the ones whose effective tax rates have risen in recent years, with their exemptions and incentives being phased out. These firms, including those in power, oil & gas, mining and pharmaceutical industries, used to pay MAT but over the last 2-3 years have moved to the marginal tax, with removal of tax reliefs. However, they still have huge amounts of accumulated MAT credits which can be used to mitigate the tax outgo. The denial of MAT credit for the new regime would mean the earlier dispensation would be more attractive for them.

The one-time transition costs, requirement for fresh investments and other hurdles posed for existing taxpayers are significant enough to dent the benefits intended in the recent tax cuts, tax experts said. Firms with turnover up to Rs 400-crore anyway did not get any big relief from the recent tax cuts, they will now have more reason to remain in the old regime.

These companies were already taxed at a concessional 25% rate after this years budget (effective rate around 29%), while the new regime’s effective rate is 25.17%. MAT credit can be utilised in years when the tax liability of a firm under the general corporate tax provisions is higher than MAT. Such credit can be carried forward for up to 15 assessment years.

As for firms already paying MAT, which include many IT firms and those in the SEZs, the Wednesday’s CBDT circular won’t make any difference. The effective MAT rate was reduced from 21.5% to 17.01% as part of the recent tax reliefs to Corporate India.

The government’s net MAT revenue in FY18 was Rs 26,427 crore and this was projected to be Rs 30,700 crore in FY19. “The tax rate for some of these (up to Rs 400 crore turnover) companies is 26% and the new tax rate under Section 115BAA is 25.17%. An existing company would not be keen in changing its taxation regime wherein the tax savings are much lower than the incentives and deductions foregone,” Naveen Wadhwa, DGM at Taxmann, said.

Before the clarification the industry was split on applicability of MAT credit as one section believed that given the new regime has no MAT provision, the pre-existing credit can’t be used to offset against future tax liabilities. The other view is that since the law hasn’t made any specific amendment to Section 115JAA (the provision governing MAT credit), credit can’t be denied to the migrating company and it can be utilised against tax payable under Section 115BAA.

“This could be a huge cost to some companies who will now perhaps consider continuing under the old regime for the time being. This was perhaps done to minimize the costs to the exchequer for the transition,” Rohinton Sidhwa, Partner, Deloitte India said. He said the new changes overall are heavily weighed in favour of new companies and new investors.

“This (the CBDT circular) will compel companies having substantial MAT credit to continue under old rates and not to avail new rate of 22%,” Ved Jain, former president of Institute of Chartered Accountants of India, said.
Some companies taking MAT credits as assets will have to write these off and take a big hit on profits, negating the purpose of boosting cash flows of firms and encouraging them to invest.

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