A Union budget effort to march corporates into India's new low-tax regime may deal a one-time blow to several companies following the old tax regime. Restrictions on tax credits under minimum alternate tax (MAT) may force startups and power sector firms to shift to the new regime, or contend with the higher cost of staying in the old regime, experts said.
Under the old tax regime, companies are required to pay minimum alternate tax (MAT) at 15% of book profits when their tax liability, after claiming deductions, falls below the MAT level. If their taxable income after accounting for exemptions is below 15%, they must still pay MAT at 15%, but they get back the difference as credits—called deferred tax asset in accounting parlance—which can be used in later years.
While lowering MAT to 14%, the budget sought to disallow businesses in the old regime from using such set-offs in future. The set-offs continue in the new regime, but even there, the use of credits has been capped—a company can use only 25% of the available tax credit in any year.
Experts said this will lead to partial or full write-down of MAT credit, potentially impacting profits and net worth for some businesses in the old regime.
“Companies in the businesses of electricity generation, transmission and distribution, who get income tax deductions under section 80 IA (4) of Income Tax Act, 1961 as well as start-ups, who get tax exemption, under 80 IAC will have to evaluate if it makes sense for them to switch to the new tax regime from 1 April,” explained Ved Jain, former president of accounting rule maker Institute of Chartered Accountants of India.
“The budget proposal does not force any company to switch to the new regime, but companies have to evaluate which regime is beneficial to them, in light of the proposed amendment. If they switch to the new regime, they have the advantage of setting off up to 25% of future tax liability using MAT credit,” said Jain.
For companies with large accumulated MAT credits or weak profit outlook, the change could translate into one-off hits to earnings and increased volatility in effective tax rates. Over the years, the government has been phasing out many existing tax incentives under the old tax regime, to nudge businesses to migrate to the new regime. Despite the new tax regime having a lower rate, many companies stay on in the old regime until the expiry of tax breaks, which are given for multiple years starting from a cut-off date.
Unused MAT credits due to the legislative changes effectively lose economic value, experts said. These deferred tax assets can be recognized in financial statements to the extent it is probable that future taxable profits will be available against which the MAT credits can be utilized.
“Managements should, based on their decision on whether to transition to the new tax regime or continue under the existing regime, reassess assumptions around deferred tax assets, including MAT credit, and evaluate whether sufficient convincing evidence exists to support their recoverability. This decision may also affect the measurement of other deferred tax balances,” said Amit K. Agarwal, partner and leader, accounting advisory, BDO India.
“Where recovery is doubtful, partial or full write‑downs may be required, along with enhanced disclosures of key judgements and estimates,” said Agarwal.
MAT was introduced broadly in its current format in the 1996-97 budget by the then finance minister P. Chidambaram to address the issue of companies reporting book profits, but keeping their tax liability too low, taking advantage of various tax deductions and exemptions.
Union budget for FY27 proposed that from 1 April 2026 (tax year 2026–27), MAT is proposed to be recharacterized as a final tax in the old regime and with no new MAT credits accruing for payments made from this date.
The MAT rationalization not only alters corporate tax liabilities but also influences financial statement reporting, requiring careful judgement under accounting standard Ind AS 12/ ICAI guidance note to ensure that recognised balances reflect the changed economic reality of MAT credit utilization, experts said.