Effect of Circular No. 29-2019:

The CBDT has vide Circular No. 29/2019 dated 2nd October 2019 clarified the law in respect of option exercised under section 115BAA of the Income-tax Act, 1961 inserted through The Taxation Laws (Amendment) Ordinance, 2019.

The CBDT has stated that representations have been received from the stakeholders seeking clarification on issues relating to exercise of option under section 115BAA (a) Allowability of brought forward loss on account of additional depreciation; and (b) Allowability of brought forward MAT credit. The issues have been examined by the CBDT and clarifications have been given.

As a result of new circular no 29/2019 dt. 2nd October, the  benefit of MAT Credit to those companies which opt for new tax rate of 22% is abruptly denied.

It had advised such companies having MAT credit to continue under existing rate of 30% in case it intends to avail MAT credit.

Implication : Such company which intends to avail MAT Credit will be required to compute its tax liability at the effective rate which is 34.94% and liability on account of MAT which under new rate of MAT will be 17.47%.

The difference of these two I., 17.47 % will be eligible MAT credit.

It will compel companies having substantial MAT credit to continue under old rates .

 For companies liable for tax @ 25% under old scheme i.e., where turnover is not more than Rs. 400 crores in FY 2017-18, the effective tax rate on 25% is 29.12 % and after MAT liability of 17.47% and the credit allowed will be @  11.65% only.

In short,  the net benefit and effect  to a company having MAT credit after this circular is that it will be able to take credit of 17.47 % instead of 13.39% presently available against its tax liability on the  tax rate of 34.94% applicable to it.

Such  companies will effectively save net 4.08% outgo in tax (if there are no benefit of exemption and deductions available to the companies ). To the extent of 4.08 %,  there will be faster adjustment of MAT credit.

The present benefit is arising as MAT rate for all companies have been reduced from 18.5% ( effective rate after including surcharge and Cess being 21.55 ) to 15% ( effective rate being 17.47% ).

Further, such companies shall continue to have benefits of all exemptions and incentives also as these will continue to be governed by old provisions.

After exhausting MAT credit such company shall be eligible to opt for reduced rate of 22% ( effective tax rate of 25.17% ).

Companies opting for old taxation rate for availing MAT credit will get benefit of 4.08% only in tax