“No MAT credits” could be a hurdle for companies tax shift
During the week, an innocuous CBDT clarification disappointed markets quite a bit. CBDT clarified that companies that opt for the new 22% tax system will not be eligible for any future MAT credits or credits for accumulated depreciation. That could be a major disincentive for Indian companies to shift to the lower tax structure. First the background!
What is MAT credit all about?
Indian tax system runs on the system of minimum alternate tax (MAT). Under that system, each year companies are required to pay a bare minimum of 18.5% of MAT to the government. Quite often, such companies may be only required to pay tax at say 15%. In that excess, the excess MAT collected will be refunded to the companies. This system of MAT credit has been going on for over 20 years now. The new 22% tax bracket proposed by the government will be without any rebates / exemptions and also will not attract any MAT. But, there is an open issue here. Most large companies have MAT credits running into hundreds of crores. In addition, they also get separate credit for any accumulated depreciation that is carried forward. These helped to reduce the effective tax. MAT was nothing but an advance tax collection system. Now by refusing any MAT credit for past years, the CBDT has put the companies looking to shift their tax bracket into a quandary as no company would be willing to lose out on their past tax credits.
What are the options?
If you were to look at the CBDT circular, there are only two options that the companies have at this point of time. Firstly, they can opt to do a major shift to the new system where they pay 22% tax profits plus cess and surcharge. But that would only be helpful if the actual exemptions and MAT credits are limited. For other companies, the only option will be to delay the onset of the 22% formula till the time the past MAT credits are fully availed. Remember, the companies that continue with the old system will still have to pay MAT at a lower rate of 15%. Hence MAT credits could still accumulate. The government needs to find a way out.
Give a one time-exemption
If the largest companies in the market do not opt for the new system, its value would be substantially diluted. It will just be an improved version of the current system. Also the absence of large companies in the 22% formula dilutes its impact. The government must consider giving companies a one-time exemption on available MAT credits. Instead of allowing them to write off the credit in the first year, they can look to amortize such accumulated credits over a longer period of time. This will not hit government revenues and also convince companies that their legitimate credits will not be lost. It can do a lot of good for the shift to New Tax regime!