Stressed Companies Get A Tax Breather
Tax relief for insolvent companies’ lenders are likely to cheer the relief granted by the tax department
Companies facing insolvency proceedings, their lenders and investors hoping to bid for assets of such companies have a reason to cheer. The tax department has announced that companies admitted for corporate insolvency will be exempted from Minimum Alternate Tax (MAT) to a certain extent.
A resolution plan for any stressed company requires banks to take a haircut on interest and write-down of the loan amount. As per accounting standards, this reduced amount is viewed as a gain to the company on which 20 percent MAT is applicable.
BloombergQuint had examined the need for this exemption last year. At that time, Eshwar Karra, chief executive officer at Phoenix ARC had explained that the lack of MAT exemption was a direct cost for incoming investor and indirect cost for lenders of the company facing insolvency proceedings.
Let’s hypothetically say that there is Rs 100 of debt in the company and the prospective bidder says that Rs 50 is the sustainable debt going forward. Because this Rs 100 debt will be written down to Rs 50, there will be a incidence of tax on the Rs 50 that is being written-down. If that exemption is not coming to the prospective bidder, he needs to factor it in his pricing and therefore what he initially held as sustainable debt i.e. Rs 50 would then come down to probably Rs 30-40. So the lender will be essentially paying for that.Eshwar Karra, CEO, Phoenix ARC
The tax department’s decision takes care of this cost to a certain extent as the amount of total loss brought forward, including unabsorbed depreciation, will be reduced from the book profit for the purposes of levy of MAT. The tax law will be amended in due course and the relief will be effective FY 2017-18, the revenue department has said.
MAT applicability on book profit, arising from loans written off for a company facing insolvency, was a roadblock in government’s agenda to revive non-performing assets, Rakesh Nangia, founding partner at tax consultancy firm Nangia & Co. said.
MAT implication on insolvent companies was an added cost for the buyers planning to submit resolution plan.Rakesh Nangia, Founding Partner, Nangia & Co.
This was an obvious miss on the government’s part because there is no sense in creating a tax liability out of the process where a company is not creating any real income, Abhishek Goenka, partner at consultancy firm PwC said. Since this cost now goes away to a certain extent, lenders will get better value from incoming investors, he added.