The Central Board of Direct Taxes (CBDT) has clarified that companies will not be allowed to adjust the minimum alternate tax (MAT) credit against their tax liabilities if they opt for lower corporation tax rates.
This may make the lower tax rates unattractive to companies enjoying tax holidays, said experts. They also said the circular may lead to litigation.
“It is clarified that the tax credit of MAT paid by the domestic company exercising the option under Section 115BAA of the (Income Tax) Act (those opting for reduced corporation tax rates) shall not be available consequent to exercising of such option,” said a circular issued by the CBDT on Wednesday.
The circular also clarified that companies opting for lower taxes will not be able to claim set-offs for any losses forwarded by them due to additional depreciation.
MAT is levied on book profit, unlike normal corporation tax, which is levied on taxable profit. Due to various exemptions and deductions, some companies, particularly in the services sector such as information technology, do not have taxable profit, but have book profit. They can adjust their MAT paid once they start earning taxable profit.
The circular also clarified that companies opting for lower taxes would not be able to claim set-offs for any losses forwarded by them due to additional depreciation.
“Because of this clarification, the new corporation tax rates may not be attractive to companies taking exemptions and incentives through tax holidays and deductions. Each company will have to carefully assess the impact of MAT credit and depreciation rates before moving to the new tax rates,” said Neeru Ahuja, partner at consultants Deloitte India.
In fact, the circular also said that the companies may shift to the new tax rates after utilising MAT credit and forward losses due to additional depreciation.
Amit Maheshwari, partner at Ashok Maheshwary & Associates LLP, said the non-availability of MAT credit is the view of the tax department and since the section related to this subject is not amended, it may result in litigation. “It is important to note that circulars are not binding on taxpayers, but are binding on the tax department,” said Maheshwari.