A “Going Out Of Business” sign sits in the window of a HHGregg Inc. store in Downers Grove, Illinois, U.S. (Photographer: Daniel Acker/Bloomberg)  

Union Budget 2018: Insolvent Companies Get MAT Relief, Allowed To Carry Forward Losses

Finance Minister Arun Jaitley provided twin reliefs that will help lower tax liability of companies undergoing insolvency and improve valuations of stressed assets.

Companies being resolved under the new Insolvency and Bankruptcy Code will get a Minimum Alternate Tax relief, according a proposal in the Budget for 2018-19. They will also be allowed to carry forward and set off losses against taxes even after change of control.

MAT Exemption

The budget proposed necessary changes to Section 115JB of the Income Tax Act to allow aggregate amount of unabsorbed depreciation and loss to be reduced from the book profit while computing Minimum Alternate Tax for a company admitted for resolution under the new bankruptcy law. That’s in line with the Jan. 6 circular of the Central Board of Direct Taxes. This is only a partial relief as compared to a blanket MAT exemption that was available under the erstwhile Sick Industrial Companies Act.

The companies had been demanding this relief as it impacts the valuation of the insolvent company. The lack of MAT exemption bears a direct cost for the incoming investor and indirect cost for lenders of the company facing insolvency proceedings, Eshwar Karra, chief executive officer at Phoenix ARC, had told BloombergQuint earlier.

The amendment will take effect from April 1 and apply from the assessment year 2018-19.

Carrying Forward Losses

The budget allowed stressed companies undergoing insolvency to carry-forward and set off losses even if there is a change of ownership—when shares amounting to more than 51 percent of the voting rights were transferred on the last day of the year or years in which the loss was incurred.

A resolution plan under the new law typically involves change in beneficial ownership of shares beyond the stipulated limit, which acts as a hurdle for restructuring and rehabilitation of such companies, the budget proposal said. To address this issue, a relaxation is allowed for companies where resolution plan has been approved, it said.

Earlier, an incoming investor looking to acquire a stressed asset was prejudiced since he came in at a worse-off position than the outgoing shareholder, Abhishek Goenka, Partner at PwC, told BloombergQuint. “He was buying a company, starting from scratch and did not have the benefit of past losses which led to greater tax liability.”

The change will have a significant impact on the overall pricing while bidding for a stressed company. Earlier, the losses incurred by the stressed company were completely wiped off.

Preserving the losses and allowing them to be carried forward will dramatically change the valuation at which potential investors are looking to acquire the asset.
Abhishek Goenka, Partner, PwC

There is a catch though—as per the proposed amendment, an opportunity will be given by the company to hear any objection from the jurisdictional Principal Commissioner or Commissioner.

“This change was essential for the success of IBC as a whole,” Sunil Kapadia, partner at EY, told BloombergQuint. “However, additional requirement of reference to principle commissioner for permission to carry forward loss is an additional burden and could have been avoided.”

These changes will also take effect from April 1.