Companies Opting For Lower Corporate Tax Rate Can’t Use MAT Credits

Companies may consider waiting before they opt for the reduced corporate tax rate as that would deny them the benefit of tax credits.

The firms that choose the reduced rate won’t be allowed to avail accumulated credits of Minimum Alternate Tax and also can’t set off loss on account of additional depreciation, according to a clarification by the Central Board of Direct Taxes issued on Wednesday. MAT is levied as a fixed percentage of profits on companies that otherwise use deductions to pay no tax.

Larger Indian corporates, especially in the technology sector, may choose to utilise the accumulated MAT credit first, Pranav Satya, national leader of international tax and transaction services at EY India, told BloombergQuint. “There will be a whole host of companies to whom it might make more sense to defer the exercise of the option to go to the 22 percent concessional tax rate regime, at least by a couple of years, and in the meantime use up the entire MAT credit accumulated that is available with them.”

To stimulate growth that has fallen to its lowest in six years, Finance Minister Nirmala Sitharaman on Sept. 20 cut the corporate tax rate to 22 percent from 30 percent for companies that don’t avail exemptions. For new local manufacturing firms, the rate is 15 percent. The effective rate, including surcharge and cesses, for the two categories is 25.17 percent and 17.01 percent, respectively.

Sitharaman also announced that the companies that choose to continue with earlier tax rates will have to pay MAT at 15 percent against 18.5 percent earlier.

The companies can exhaust their credits and set off losses on account of additional depreciation, before moving to the new rates, the CBDT circular said. According to budget documents, companies claimed Rs 15,365 crore worth of MAT credit in 2017-18.

“This (denying MAT credits) could be a huge cost to some companies who will now perhaps consider continuing under the old regime for the time being,” Rohinton Sidhwa, partner at Deloitte India, said. The government came out with the clarification to minimise the costs to the exchequer during the transition, he said.

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 original announcement, according to Sidhwa. The changes in rates will, however, benefit new companies, he said.