Recent slowdown and economic downturn had created a lot of uncertainty. In order to address the problem and revive the economy, the government on 20 September 2019 announced major tax reforms which included the introduction of lower corporate tax regime by reducing the tax rates from 30/25% to 22% subject to the condition that such companies would not avail specified tax incentives/ deductions. Further, it was also announced that Minimum Alternate Tax (MAT) provisions would also not apply.
While the revised provisions provided that beneficial tax rates would apply only where specified deductions/allowances are not claimed, there was no clarity as to whether carried forward losses on account of additional depreciation would be allowed to be carried forward. Also, there was confusion on whether MAT credit would be available for set-off.
In light of the above, the Central Board of Direct Taxes (CBDT) received many representations regarding the treatment to be given to brought forward MAT credit as well as to brought forward loss on account of additional depreciation. In order to provide clarity, the CBDT issued a Clarificatory Circular No. 29 of 2019 dated 2 October 2019. The clarifications are as follows:
- Brought forward MAT
The CBDT has clarified that since MAT provisions in its entirety would not be applicable to the companies opting for a lower tax regime, the question of MAT credit set-off does not arise at all. Hence, companies opting for a lower tax regime, would not be allowed to set-off any brought forward MAT credit against normal income-tax.
- Brought forward loss on
account of additional depreciation
The CBDT has clarified that companies can opt for a lower tax regime subject to giving up specific tax incentives/ deductions which included additional depreciation within its ambit. Further, the Circular also clarified that losses attributed to such tax incentives/ deductions would not be allowed to be set-off in the current or any subsequent assessment year. Hence, the companies won't be able to set-off any brought forward additional depreciation loss once the companies opt for the lower tax regime.
However, the CBDT also clarified that there is no deadline within which the companies should opt for the lower tax regime. Hence, the companies may opt for the lower tax regime after exhausting the brought forward MAT credit/ additional depreciation loss.
Though the Circular does not allow for MAT credit/ additional depreciation loss set-off if companies opt for the lower tax regime, it does come with a breather. The companies can opt for the lower tax regime after exhausting such credits/ losses.
Having said this, it would be worthwhile to note that many
companies, especially IT companies have huge MAT credits available
with them (approximately INR 1.50 billion, as per a recent news
article in economic times). These companies would be required to
weigh both the options i.e. exhaust credits/ losses and then opt
for the lower tax regime or opt for the lower tax regime
immediately and write-off the credits/ losses.
Interestingly, given that the clarification has come through a circular, there is a possibility that the taxpayers could adopt a position that circulars cannot bind the taxpayer. This proposition has been upheld earlier by various courts and hence it may be worthwhile for companies to evaluate the quantum of credit available vis-à-vis litigation costs before deciding the way forward.
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