What is this issue of MAT credits that companies have to lose if they shift to the lower tax structure? Can you tell me how this MAT credit issue works and if it will impact tax shift?

Over the last few weeks since the FM announced lower corporate tax rates, there has been confusion over the subject of MAT credits. CBDT had recently clarified that companies that shift to the new 22% tax formula will not enjoy MAT credit. This has created some concern but let us quickly run through the MAT concept to appreciate this well.

Let us first understand why MAT credit matters to companies? Minimum alternate tax was introduced more than 20 years back but the rate of MAT had consistently increased from 30% of tax liability to over 65%. Effective 2017, Indian companies were permitted to carry forward their MAT credits for a period 15 years during which they could write off the same against profits. As per a study by ETIG, the total MAT credits pending in books of Indian companies were to the tune of Rs.75,000 crore. The worry was that all these MAT credits would be lost. If you look at the MAT credit companies it includes companies like RIL, Power Grid, NTPC etc which have MAT credits of over Rs.8000 crore reach.

However, these concerns are misplaced because that is not how it will work. MAT credits are unlikely to be lost. The effective tax rate is 34.94% (30% tax + 12% surcharge + 4% cess). Under the new formula, this effective rate will work out to just 25.17%. That is a clear benefit of 9.77%. So, for companies that are paying higher than 25.17% and do not have too much of allowances or MAT credits to worry about, the choice is clear. They can just move over to the new tax formula and save 9.77% tax. The key question is, what happens to the companies with existing MAT credits that are available to be absorbed over the next 15 years?

What the shift means is that once you shift to the new tax formula, you only get tax shields on your MAT credit to the extent of 25.17% due to the lower tax incidence. But this is the case with any tax exemption. It is reliant on the rate of tax. But there a solution as L&T Finance has done in its latest quarter results and that could hold the key. What L&T Finance has done is that they have taken their deferred MAT available and written it down by 9.77% (difference in the tax rates). This has been written off as a one-time loss in the September quarter. They are shifting to the new tax formula effective the fiscal year 2019-20. Effectively, companies with profits can use this formula to reduce their current tax outflow and also shift to a rate of tax that is substantially lower at 25.17%! It is that simple.