MAT Clarification Rains On Corporate Tax Rate Cut Parade? BQ Explains
BQ Explains why the denial of MAT credit may dampen the new 22% corporate tax rate cheer.
Even as India Inc. was assessing the potential impact of the corporate tax rate cuts announced by Finance Minister Nirmala Sitharaman two weeks ago, the revenue department has issued an important circular that is likely to prompt businesses to redo their tax math.
As per the announcement and subsequent ordinance, companies can opt to be taxed at a new headline rate of 22 percent (surcharge and cess additional) if they give up all exemptions and incentives. No Minimum Alternate Tax will be levied on such companies. Companies can also opt to continue with the erstwhile headline rate of 30 percent. For such companies, the MAT rate has been reduced from 18.5 percent to 15 percent (surcharge and cess additional).
Now, the tax department has clarified that companies opting for the 22 percent corporate tax rate won’t be allowed to set off accumulated MAT credits against future tax liability.
“..it may be noted that as the provisions of section 115JB relating to MAT itself shall not be applicable to the domestic company which exercises option under section 115BAA, it is hereby clarified that the tax credit of MAT paid by the domestic company exercising option under section 115BAA of the Act shall not be available consequent to exercising of such option.”
But what is Minimum Alternate Tax, how does the credit availment work and what will be the impact of this clarification?
BQ explains...
What’s MAT?
Minimum Alternate Tax, applicable on book profit, was reintroduced in 1997 with the intent to bring ‘zero tax companies’ under the tax net. It was levied to address situations where companies reported a lower taxable income after availing tax benefits such as deductions, industry or area-based incentives, accelerated depreciation, etc and reduced their tax liability or paid no tax at all.
In such a case, to determine its tax liability -
- a company must first determine the rate applicable to it and compute the tax it needs to pay. This is known as normal tax liability.
- It then needs to compute its tax liability by applying 18.5 percent (plus surcharge and cess) on its book profits- this is called MAT.
- The higher of the two will be a company’s tax liability.
For instance: Let’s say the taxable income of a company, XYZ Ltd., (turnover above Rs 400 crore) as per the income tax provisions is Rs 8,40,000, after tax benefits availed. But it book profit of the company is Rs. 18,40,000.
XYZ Ltd.’s Normal Tax Liability: 30 percent of Rs 8,40,000 = Rs 2,52,000
XYZ Ltd.’s MAT Liability: 18.5 percent of Rs 18,40,000 crores = Rs 3,40,400.
Thus, the tax liability of XYZ Ltd. will be Rs. 3,40,400 (plus cess and surcharge), being higher than the normal tax liability.
How Does MAT Credit Work?
If in any year the company pays tax as per MAT provisions, then it is entitled to claim credit of MAT paid over and above the normal tax liability in the subsequent years. Currently, this MAT credit is allowed a carry forward for a period of 15 financial years.
Returning to the earlier illustration—the MAT liability of XYZ Ltd. is Rs 88,400 more than its normal tax liability.
This excess Rs 88,400 tax paid will serve as a credit that can be offset against future tax liabilities, valid for 15 years.
The credit can be adjusted in the year in which the liability of the company as per the normal tax provisions is more than the MAT liability.
CBDT’s Latest Clarification: Impact
The tax department has now clarified that if a company chooses to move to the 22 percent corporate tax rate regime, it cannot continue to use accumulated MAT credits from previous years. Though, companies can choose to move to the 22 percent tax rate once they’ve exhausted their accumulated MAT credits, CBDT has said.
“This clarification by the CBDT is highly disappointing. It’s really not helpful to tell taxpayers that they can move to the lower rate once they’ve ran out of MAT credits,” Daksha Baxi, tax partner at law firm Cyril Amarchand Mangaldas told BloombergQuint. Not permitting them the MAT credit with lower tax rate election amounts to retrospectively taking away the benefit of deductions availed by the companies, Baxi pointed out.
Companies were made to pay MAT because they availed legitimate deductions and reduced their tax liability. If all the benefit was given to them, their tax payable should have been much less or nil if they were not made to pay MAT. So now when the company wants to claim credit for MAT, i.e. the tax that it was made to pay despite the exemptions and deductions, the company is not claiming the benefits of the deductions now. It is simply encashing a benefit that was given to it in the past which was postponed because the government wanted the tax from the company even though it was not liable due to deductions.Daksha Baxi, Partner, Cyril Amarchand Mangaldas
It would have made sense if the department had said that companies who move to the lower tax regime of 22 percent can use MAT credit proportional to the now reduced MAT rate of 15 percent even though they are not subject to MAT, she added.
By way of illustration she explained—let's say a company has accumulated MAT credit of Rs 100. The company’s tax liability for this year on the basis of 22 percent is Rs 220. Ideally, if full MAT credit was allowed, the company would have to pay Rs 120 as tax. But it would’ve been fair for the department to say that if this Rs 120 is less than 15 percent (new MAT rate for companies continuing with old tax rate) of the company’s profit, the MAT credit would be restricted and the entire credit cannot be availed in this year, but carried forward to the following year till it is exhausted. Giving MAT credit proportional to the new 15 percent rate would’ve been a fair approach, Baxi said.
She also pointed out that that the MAT credit issue has been clarified only by way of a circular and the government may have to make specific amendments to the Income Tax Act to deny accumulated MAT credit to companies.
There will be a whole host of companies for whom now it might make more sense to defer the exercise of moving to the 22 percent consumption tax rate regime by at least by a couple of years, Pranav Sayta, tax partner at consulting firm EY told BloombergQuint.
In the meantime, (they can) use up the entire MAT credit accumulated that is available with them. Given that the MAT rate itself has dropped by about 4 percent for such companies who do not exercise the option of the 22 percent tax rate, it might mean a little quicker utilisation of the accumulated MAT credit.Pranav Sayta, Partner - Tax and Regulatory Services, EY
There will be several large corporates, especially in the technology sector, for whom continuing with the old tax rate of 30 percent might make more sense, Sayta added. Many of these companies avail of Special Economic Zone benefits.
While the CBDT’s circular has brought clarity, it may materially reduce the overall tax advantage expected to arise from the recent ordinance for companies having a significant accumulated MAT credit, he added.