NEW DELHI :
Mergers and acquisitions as well as resolution of corporate bankruptcy are set to get a leg-up with the minimum alternative tax (MAT) exemption that the government announced on Friday as part of corporate tax reform, experts said.
The Taxation Laws (Amendment) Ordinance, 2019 promulgated last week exempted companies opting for the lower corporate tax rate of 22% and new manufacturing companies eligible for a 15% tax rate from payment of MAT.
MAT is the minimum tax to be paid by companies that keep their taxable profit low by using tax breaks. The low tax rates of 22% and 15% are available to companies only if they do not avail of any tax incentives and therefore there is little chance of them lowering their tax outgo further using incentives. However, this exemption from MAT given to beneficiaries of the lower tax rates gives them some much-needed relief on certain specific transactions, said experts.
One of the areas is sale of capital assets. Prior to the amendment to the Income Tax Act through the Ordinance on Friday, companies were liable to pay MAT on the difference between sale proceeds of capital assets and the cost of purchase even if there was no capital gain after taking into account the indexed cost of acquisition.
The MAT exemption has given relief to companies from this liability.
“This is a huge relief for holding companies owning shares in other companies which were earlier hit by MAT liability on share sales," said Girish Vanvari, founder of advisory firm Transaction Square.
Ved Jain, a former president of accounting rule maker Institute of Chartered Accountants of India (ICAI), said the MAT exemption will lead to better realization of the asset sale. “It also smoothens the bankruptcy resolution process," said Jain.
Some of the provisions in the Income Tax Act has been proving to be a problem for companies making their way through bankruptcy tribunals. When banks settle a bad loan with the corporate defaulter for anything less than the total outstanding amount, the amount of relief that the defaulting company gets on repayment is often treated as income liable for MAT payment in the hands of the corporate debtor although the company itself was loss making. The MAT exemption addresses this issue effectively and makes resolution of bad loans easier.
The corporate tax rate reduction benefits large companies more than small ones as income tax has been made more progressive in recent years with the tax liability as a share of profits going up with rising corporate incomes. Businesses with income of ₹1-10 crore pay a surcharge of 7% on the applicable corporate tax outgo and those earning more pay a 12% surcharge. This has led to an effective tax rate of 26%-29.12% for companies with sales up to ₹400 crore and new manufacturers in the 25% corporate tax slab depending on income levels. The effective rate for larger companies in the 30% slab was 31.2%- 34.95%.
The effective tax rate comes down to 25.17% for those opting for the new lower rate without tax incentives and 17.16% for new manufacturing companies inclusive of cess and surcharge.