Corporate tax rate cut euphoria will now die down after CBDT's clarification on MAT credit, says tax expert

Finance minister Nirmala Sitharaman last month announced corporate tax rate cuts in a bid to stimulate economic slowdown in the country. Further clarifications about corporate taxation have been subsequently made, including  not allowing carry forward of MAT for companies opting for 22 percent tax rate.

Dinesh Kanabar, CEO of Dhruva Advisors and Hitesh Gajaria of KPMG discussed the new tax regime and how companies will adjust in an interview with CNBC-TV18.

“I would now break-up the companies into three parts. Companies which are today having a rate of tax which is lower than 25 percent and the question was — would they want to move to 25 percent regime on a long-term basis. After this clarification the answer would be no because the MAT credit would lapse,” said Kanabar.

He further said that Central Board of Direct Taxes’ (CBDT) clarification on MAT credit will lead to huge amount of litigation.

“There are companies which have a rate of tax higher than 25 percent; so they are between 25 percent and 35 percent today on an all-inclusive basis. For them the decision may be straightforward unless they are going to go for an expansion,” said Kanabar.

He added: “The third set of companies are going to look at manufacturing activity on a going forward basis and for them the incentive will be to set up a new company from October 1, which is going to be engaging the business of manufacture.”

Talking about MAT credit, Gajaria said: “The euphoria that we saw on September 28 when the market went up almost 2,000 points perhaps will be now tempered because what the market was counting on was those companies which are above 25 percent threshold and paying up to 35 percent, — and a quick back of the envelop calculation showed that more than 25 out of the Nifty 50 companies were there in that space — they would have been in a sweet spot if they had not been restricted now with this denial of carry-forward of MAT credit."

He added: "Not all of them would have MAT credits, so each company will have to now reexamine its own position but it’s not a carte blanche anymore; these companies cannot freely opt for the new regime, they will have to do all their calculations once again. It's back to the drawing board,” he added.

On companies with high amount of credit, Gajaria said: “The least affected would be consumer facing local domestic companies who were not enjoying any tax holiday. So those possibilities would remain unscathed but any company which is doing infrastructure, real estate, export-oriented special economic zones etc. those are the companies which will need to go back to the drawing board.”