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
 – Others  XXXX NA
Sub-Total (B)  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
MAT Computation NA YES
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 comparison of the percentages are not simple comparison, since the base income for current tax and MAT are different. Current tax rate is applied on the taxable income computed considering deduction/exemptions applicable under the IT Act. On the other hand, MAT is applied on the book profit adjusted for specific additions/reductions mentioned in Section 115JB of IT Act.
  • The utilisation of MAT credit is conditional and can be carried forward up to 15 assessment years. The MAT credit is allowed to be set off in the year in which the tax becomes payable as per the provisions of the IT Act, only to the extent of the difference between the tax as per normal provisions and the MAT tax as per Section 115JB.
  • While analysis the options, the corporates have to consider both the benefits derived of the lower tax rate (34.94% – 25.17%), as well the opportunities foregone – MAT credit foregone, exemptions/deductions to be given up while calculating the taxable income.
  • The MAT rate has been reduced to 17.47% from earlier 21.55% (these are including surcharge and cess). Hence, it gives more window for the corporates (who are considering to delay their exercise of option) to utilise the MAT credit.
  • The option is irreversible one. Once the option has been exercised for any previous year, it cannot be subsequently withdrawn.

Conclusion:

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.

Also Read relevant Press Releases and Notifications

Taxation Laws (Amendment) Ordinance, 2019

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