Budget makes MAT a final tax, restricts credit set-off to push new regime

Budget 2026 converts MAT into a final levy at 14 per cent, limits MAT credit utilisation, and extends exemptions for non-residents to encourage a shift to the new concessional corporate tax regime

In a major overhaul aimed at simplifying corporate taxation and encouraging companies to migrate to the new concessional tax regime, Finance Minister Nirmala Sitharaman on Sunday proposed to convert the Minimum Alternate Tax (MAT) into a final tax. The FM, while reducing its rate, restricted the use of accumulated MAT credits.

 

Currently levied at 15 per cent on book profits for companies opting for the old tax regime with exemptions and deductions, MAT will now become a final tax with no fresh credit accumulation from Assessment Year 2026-27.

 

The rate has been slashed to 14 per cent to soften the impact.

 

 

“To encourage companies to shift to the new regime, set-off of brought forward MAT credit is proposed to be allowed only in the new regime to an extent of one-fourth of the tax liability,” Sitharaman said in her Budget speech.

 

Existing MAT credits accumulated up to March 31, 2026, can still be carried forward for 15 years, but domestic companies opting for the new regime (22 per cent basic rate + surcharge/cess) will be able to set off only 25 per cent of their regular tax liability each year.

 

Foreign companies will be allowed to set off only to the extent regular tax exceeds MAT liability.

 

Separately, the Budget extends full MAT exemption to all non-residents opting for presumptive taxation. This includes new additions such as operation of cruise ships and provision of services/technology for setting up electronics manufacturing facilities in India. 

 

According to Amit Maheshwari, partner with AKM Global, importantly, MAT technically applied even to non-resident companies opting for presumptive taxation, creating a fundamental mismatch because MAT is computed on book profits, while presumptive schemes are intended to be simplified.

 

“This overlap increased compliance burden and caused uncertainty, and led to potential prolonged litigations, despite judicial reasoning and consistent government assurances that presumptive regimes should function as self-contained codes.

 

Henceforth, the Finance Bill, 2026 addresses this controversy by expressly exempting non-residents taxed on a presumptive basis from MAT, aligning the law with legislative intent and providing greater certainty to foreign businesses, in line with the ease of doing business objective,” Maheshwari said.

 

“This policy change effectively incentivises companies to migrate to the new tax regime, as the continued benefit of MAT credit is now tied to such a move. While the government has not made the new regime mandatory, the structure of the MAT credit carry-forward rules is a clear nudge, if not an outright push, for taxpayers to shift to the new, simplified regime. Companies that remain in the old regime will find their ability to utilise MAT credits severely curtailed, making the new regime the more attractive option for most,” said Hitesh Sawhney, partner at Price Waterhouse & Co LLP.

 

According to Maheshwari, MAT credit accumulated up to March 30, 2026, remains eligible for limited set-off. However, this may create a hurdle for utilising accumulated MAT credits.