Indian MNCs under MAT set for higher tax outgo

Budget provision intends to restrict MAT credit available on foreign tax credits

The Union Budget has introduced a provision that intends to restrict the minimum alternate tax (MAT) credit available on foreign tax credits (FTC), which could increase the overall tax outgo for Indian companies having overseas operations, especially those paying sizeable dividends.
 
The Budget has introduced an amendment in the minimum alternate tax (MAT) provisions (applicable to companies) and alternate minimum tax (AMT) provisions (applicable to non-corporates) for rationalising the quantum of MAT and AMT credits which can be carried forward by the relevant Indian taxpayer, if he has claimed foreign tax credits against its MAT/AMT liability in a particular year.
 

Under the current MAT/AMT credit mechanism, a taxpayer can carry forward the entire MAT/AMT liability for offset against future taxes, without adjusting any such excess FTC availed. A typical example of this would be foreign dividends where the normal effective tax rate is 17.3 per cent, whereas the effective MAT rate could be 21.34 per cent.
 
“Profitable operations of Indian MNCs overseas will be impacted,” said Deepa Dalal, partner, transaction tax, EY India. As the effective tax would increase, more such companies would prefer to park their money abroad till the time they come out of MAT, rather than bring it back home, Dalal said.
 
According to Section 115JB of the Income Tax Act, a company is required to pay MAT in case the tax payable by a company otherwise is less than 18.5 per cent of its adjusted book profits.
 
“The Budget amendment is possibly attempting to plug a double benefit, which an Indian taxpayer liable under MAT/AMT could potentially avail if he is offsetting certain foreign tax credits against such MAT/AMT,” said Ravi Mehta, partner, Grant Thornton. “Following the amendment, the MAT credit available to the Indian company for carry forward would need to be reduced to the extent the FTC claimed against MAT exceeds the FTC that would have been availed had it been subject to normal provisions. What remains unclear, however, is what would happen if a company is subject to MAT because of losses under normal provisions,” he said.
 
Let’s understand the implications with an example (see table). Assume an Indian company receives a gross dividend of $100 from its foreign subsidiary in a tax year. Say, on such dividends, the source country (i.e. the country in which the foreign subsidiary is situated) had already withheld 20 per cent taxes on such dividends.
 
The Indian company would be allowed to offset a FTC of 20 under MAT as against 17.3, had it been liable to normal taxes. In other words, the Indian company has claimed a higher FTC of 2.7 if it’s under MAT as against normal provisions. The proposed Budget amendment on MAT/AMT is trying to plug this double benefit by reducing the excess FTC (2.7 in the above example) from the MAT credit that can be carried forward. In other words, the MAT credit that can be carried forward in the above example stands would be 18.64 (21.34 – 2.7).
 
The Budget has given a concession for these companies, however. Under the existing provisions, a company under MAT can carry forward its entire Indian tax liability under MAT for offset against its normal tax liability for a period of 10 years. This period has now been increased to 15 years by the Finance Bill.