The recent changes in the corporate tax structure abolished the requirement of minimum alternative tax (MAT) for firms that opt for the new low-rates regime but have left it ambiguous if they could utilise accumulated MAT credit in the new regime. Tax experts say if the credits are not made available to the firms, companies that carry MAT credit as assets will have to write these off and take a big hit on profits, negating the purpose of boosting the cash flows of firms and prompting them to invest.
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A clarification is being eagerly awaited by firms and chartered accountants.
A finance ministry official acknowledged the confusion but said as the Ordinance issued on Friday is silent on use of MAT credit for those migrating to the new regime, it meant that accumulated credits can’t be utilised. Of course, if a firm chooses to remain with the old tax structure, the credits will be available to it.
Experts said the grey area was likely to discourage firms, especially those with less than Rs 400-crore annual turnover to opt for the new rates.
For these firms, the differential in effective tax rates between the two regimes are rather thin, so denial of MAT could easily make the new regime unattractive.
“The tax rate for some of these 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.
Wadhwa added that 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 utilized against tax payable under Section 115BAA.
MAT is applicable on book profit as opposed to the taxable income where the corporate tax applies. The provision targets firms whose taxable income, upon which the regular corporate tax rate is levied, are very low owing to exemptions and deductions but maintain a substantial book profit. The MAT rate earlier was 18.5% (excluding cess and surcharge) but has now been brought down to 15%. However, firms opting for the new corporate tax regime do not have to pay any MAT at all.
MAT credit can be utilised only in years when the tax a firm is required to pay tax under normal provisions is higher than MAT. Such credit can be carried forward for up to 15 assessment years.
“Companies may have pre-existing MAT credit available and an ambiguity does arise whether accumulated MAT credit can be claimed wherein there is no liability of MAT. There is a possible position that since the provisions of section since 115BAA do not provide for levy of MAT, accordingly MAT credit should not be allowed and more so as it an option exercised by companies. At the same time, given the rationale of introduction of MAT, credit for accumulated MAT credit should be allowed is another plausible view. Given this ambiguity, it is desirable that the government should clarify this matter,” Vishal Anand, partner-corporate and international tax, PwC India said.
“Denial of the MAT credit may deter many companies from opting for the concessional regime of 22% tax rate and to that extent nullifying the very purpose for which these provisions are introduced. The government should favourably clarify and provide a mechanism for availing such credit which is in line with the existing provisions,” Umesh K Gala, partner at Dhruva Advisors LLP, said.
Ved Jain, former ICAI president, said, “Ideally, MAT credit should be allowed in full to be adjusted as it is a carried forward asset. However, in case fiscal deficit is a challenge, the government may consider allowing carried-forward asset MAT credit on a staggered basis… In case of new manufacturing companies, where applicable tax rate will be 15%, there is no issue of MAT credit as all these companies are to be new and the option of 15% (17.01%) is to be exercised in the very first year.”