One of the provisions inserted in the recent tax amendments gives an option to domestic companies to pay tax at a rate of 22% (effective rate is 25.17% inclusive of surcharge and cess) subject to the condition that it does not avail any exemptions or incentives.
The exemption from paying minimum alternative tax (MAT) for companies opting for the new corporate tax structure, could make investing in stressed companies undergoing corporate insolvency resolution process, or CIRP, more attractive.
One of the provisions inserted in the recent tax amendments gives an option to domestic companies to pay tax at a rate of 22% (effective rate is 25.17% inclusive of surcharge and cess) subject to the condition that it does not avail any exemptions or incentives. In addition to this, such companies are also not required to pay tax on book profits as required under the MAT regime.
While this impacts all domestic companies, the exemption from paying MAT could help speed-up resolution of stressed companies in particular. According to Anish Shah, director (transaction tax, tax & regulatory services), BDO India, there are cases of stressed companies where the book losses and unabsorbed depreciation available to them are not sufficient compared to the write back that these companies have to undertake on account of haircut taken by the financial and other creditors. In such situations there could arise a MAT implication in the hands of such companies.
For instance, if lenders have taken a 40% haircut (Rs 40 crore) from a Rs 100-crore exposure to a stressed company, that Rs 40 crore would generally be credited to the profit and loss account of the company. So, if there are no carry forward losses to be set off, this entire `40 crore could be subject to MAT. However, if this company opts for MAT exemption, which is provided under the new amendment, the write back is no longer subject to MAT.
However, this benefit is available only to stressed companies where effect of loan write back is given in the current financial year, and not previously resolved cases. Shah said one of the reasons why the resolutions are getting delayed is also because of the MAT or tax liability that would arise by acquiring these companies. “With this exemption, the investors will be relieved of not putting in money to pay taxes to the government, but rather the money can go towards its revival,” he said.
Ideally, companies are required to pay tax on the taxable profit. For calculating taxable profit, there are certain additions and deletions that are done in the book profit. However, due to some tax exemptions if any or carry forward tax losses, the company’s tax profit could get reduced to zero. Still these companies are required to pay tax at least on their book profit, which is called MAT.