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Tax Alert - CBDT relaxes MAT provisions for companies under insolvency proceedings

10 January 2018


Section 115JB of the Income-tax Act, 1961 (the Act) provides for levy of Minimum Alternate Tax (MAT) on companies at 18.5% of book profits if tax under normal provisions is less than tax on book profits. For computation of book profits, one of the prescribed downward adjustment to the profit as shown in statement of profit and loss provides for reduction of lower of loss brought forward or unabsorbed depreciation as per the books of account.

Under the provisions of Insolvency and Bankruptcy Code (IBC), proceedings could be initiated upon default of a company to repay its debts. To revive such companies, the creditors may agree for a waiver of debt or lower amount of repayment of debt. In such a case, the write back of liabilities credited to statement of profit and loss may trigger MAT liability (possible in case carried forward losses set off under normal provisions may eliminate taxable income, if any). Further, if either of loss brought forward or unabsorbed depreciation is lower, the book profit computation as per existing provisions restricts reduction to only such lower amount. Accordingly, the past book losses are not allowed in entirely. Owing to MAT liability, the companies already grappling with losses and trying to recover, face financial hardship. The trigger of MAT also has impact for lenders and prospective bidders.

The Press Release

After considering various representations made by the stakeholders, the Central Board of Direct Taxes has relaxed the provisions of MAT[i]. With effect from fiscal year 2017-18, the amount of total loss brought forward (including unabsorbed depreciation) shall be allowed to be reduced from book profit. This applies to companies against whom an application for corporate insolvency resolution process has been admitted by the Adjudicating Authority under section 7 or section 9 or section 10[ii] of the IBC.

Appropriate changes in the tax law will be made in the due course. 

BDO Comments

The Press Release reflects yet another move by the Government to reduce the roadblocks faced in effective resolution process of stressed companies. The relaxation will minimize the financial hardship of such companies in view of deduction of total carried forward book losses including unabsorbed depreciation. With concerns over tax cost addressed by the CBDT, this augurs well for lenders and incoming investors as well. It needs to be noted that the relaxation may not applicable to companies opting for voluntary liquidation. Alongwith suitable amendments in MAT legislative provisions, the Government is expected to clarify, inter-alia, tax implications under normal provisions of the Act because waiver of principal amount of loan.  

[i] Press Release dated 6 January 2018

[ii] Provides for mechanism of initiation of the Corporate Insolvency Resolution Process