The Central Board of Income taxes, vide Circular No. 29/2019 dated 2nd October 2019 have issued clarification on the usability of the Minimum Alternate Taxes (MAT), subsequent to the issue of the Taxation Laws (Amendment) Ordinance, 2019.
The Amendment Ordinance, had provided an option to the existing domestic company of paying tax at reduced base rate of 22% – subject to condition that they will not avail certain specified deduction/exemptions. (Refer to my article dated 23rd September 2019 for more details). Additionally, it was mentioned therein, that MAT would not be applicable to such companies. However, the Ordinance was silent on the treatment of the MAT tax credit brought forward from preceding assessment years as per Section 115JAA. Will this MAT credit brought forward, still be available for set off for companies opting for concessional tax rate?
The above has been an important issue for discussion for companies carrying huge amount of MAT credit outstanding as at 31 March 2019. These include companies in IT/ITES sector/infrastructure (claiming high deductions under Chapter VI of income tax), NBFC companies (having high tax free treasury income), etc.
We will discuss whether the Circular has been successful in clarifying the current situation for these companies, or whether it adds to the prevailing uncertainty as to the utilisation of MAT credit:
The Circular clarifies that “the tax credit of MAT paid by the domestic company exercising the option under section 115BAA shall not be available consequent to exercising of such option.” Once the option of reduced base rate has been chosen, the MAT credit is rendered useless and no deduction will be available henceforth. The Circular adds that since there is no timeline for choosing the reduced tax base option, the Companies can continue with the earlier tax regime in order to reap benefit of the MAT credit.
Simply put, the tax experts in the Companies having high MAT credit as on 31 March 2019 would now have their task cut out. They will need to do a cash out flow evaluation for the future periods under both the below mentioned scenarios:
a) Pay tax rate @ 25.17 percent and ignore the MAT credit outstanding, or,
b) Continue with the current tax regime @34.94 percent or reduced MAT rate @17.47% (as applicable) and avail the benefit of MAT credit outstanding (as per existing income tax provisions);
The cash flow projections need to be done considering the below table:
|Option 1||Option 2|
|Description of the Option||Tax @ 25.17 % and ignore MAT||Continue with current provisions|
|Taxable Income as per IT Act (A)||XXXX||XXXX|
|(considering all provisions)|
|Deductions/exemptions given up|
|– Additional Depreciation: 20%||XXXX||NA|
|– Investment Allowance: 15%||XXXX||NA|
|– scientific research benefits||XXXX||NA|
|– Chapter VIA deductions||XXXX||NA|
|Revised Taxable Income (A) + (B)||XXXX||XXXX|
|Tax Rate to be applied on above||25.17%||34.94%|
|CURRENT TAX (i)||XXXX||XXXX|
|Book Profit as per Section 115JB||NA||XXXX|
|Tax Rate to be applied on above||NA||17.47%|
|MINIMUM ALTERNATE TAX (ii)||NA||XXXX|
|Tax Payable (iii)||CURRENT TAX (i)||Higher of (i) or (ii)|
|Utilisation of MAT (iv)||NA||Only to extent of
(i) – (ii)
|Total Tax Pay-Out||(iii)||(iii) – (iv)|
Certain things to consider in the above analysis:
The Circular does provide an air of clarity for the industry. The corporates having large MAT credits, would now have to carry out the above discussed analysis in order to arrive at the best suited option.
The corporates would have to prepare the quarterly financial results for the quarter ended 30 September very soon, and hence the decision have to be taken by then. These corporates (having high MAT credits) would have to give explanatory notes to their results since choosing either options would be expected to have material impact in their results.
If they opt to exercise the option, the current and the deferred tax would have to be recomputed at the revised tax rate (25.17%). At the same time, the MAT credit will have to be written off in the Profit and loss, since they would be rendered useless. On the other hand if they continue with the current income tax provisions, ignoring the reduced tax rate option, suitable note has to be provided in the financial results for explaining the rationale of the decisions. The analysis and the estimation would have to be vetted by the statutory auditors. The financial results for the quarter ended 30 September 2019 would be an interesting viewing for sure.
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