Corporate tax cut: Here is why assessing the impact of MAT clarification is crucial

Recently, the Government of India proposed the biggest-ever reduction in corporate tax rate by reducing it to 22 percent, as against the current 30 percent (25 percent for corporates with lower turnover thresholds). The reduced rate is available to domestic corporates without allowing for specified deductions/ exemptions/ incentives provided under the Income Tax Act. This, along with a slew of other changes were made to the corporate tax laws through Taxation Laws (Amendment) Ordinance 2019 to make amendments in the Income Tax Act, 1961 and the Finance (No. 2) Act 2019.

The ordinance also clarified that companies opting for the 22 percent tax rate are not required to pay Minimum Alternate Tax (MAT) which led to discussion about availability of past MAT credits if a company opts for lower rate of 22 percent with strong arguments supporting each view. The government did a commendable job of clarifying their position on this issue through Circular No. 29/ 2019 dated October 2, 2019. It clarified certain uncertainties arising out of the ordinance, including a specific clarification that brought forward credit of taxes paid under MAT in any tax years prior to opting for the reduced rate would no longer be available under the new regime.

While the government has clarified its position with regard to MAT credits, binding effect of CBDT clarifications has been a subject matter of litigation in the past and it may still be open to debate till it gets enacted under the Income tax Act. Considering this, impact on the quantum of advance tax and consequential interest liability, apart from the accounting implications may need consideration by taxpayers.

The circular also clarified that in the absence of any time line for exercising the option to be governed under the new regime, a company may opt for the same after it has exhausted the accumulated MAT credit by being governed by the regular taxation regime existing under the Act prior to Ordinance. Considering the clarification, and also that the new regime gives an option to taxpayers to switch over as per their convenience, companies having large MAT credits may prefer to continue with the old regime, till the time unabsorbed MAT credits are utilised.

While the circular provides the much-needed clarity with regard to MAT credits and is likely to be of immediate relevance for taxpayers who are contemplating to opt for the 22 percent tax rate, this may make the lower tax rates unattractive to companies enjoying tax holidays and that have substantial MAT credits.

CBDT also clarified non-availability of brought-forward losses on account of additional depreciation arising in any tax year prior to opting for the reduced tax rate. Accordingly, taxpayers opting for the new rate would need to assess the quantum of such losses carried by them in their books and impact on tax liability should they opt for the reduced tax rate under the new regime. It may, however, be noted that there may not be any impact on claim for set-off of unabsorbed normal depreciation for such taxpayers.

Non-availability of brought-forward credit of taxes paid under MAT provisions may substantially impact companies in sectors such as IT, infrastructure and real estate. Having said that, it would be imperative for each company to carefully assess the impact of the circular on its tax position, do an as-is vs. proposed tax cost comparative, while keeping business plans and projections in perspective. In the interim, the issue may not lose steam and some level of litigation is expected to surround the issue.