Budget’s MAT overhaul may trigger one-off hits to select company financial statements

Subscribe to enjoy similar stories. 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,