New Corporate Tax Rate of 22% & Its Impact:Companies with MAT credit not at Par with Other Companies
To give boost to the economy, promote ‘Make in India’ & to tackle unemployment issue, Government has amended Income Tax Act – 1961 by Taxation Laws (Amendment) Ordinance – 2019 to cut the corporate tax rate for all the domestic companies to 22% with few riders. Companies opting for a lower tax rate of 22% can not avail credit of their accumulated Minimum Alternate Tax (MAT) & cannot get the benefit of additional depreciation & few other deductions & exemptions.
If companies wish to avail the MAT credit, benefit of 22% tax rate cannot be availed by such companies & they will have to pay the tax at old rates of 25% or 30% under the old regime.
The only good part of the rider is that all existing companies are given free choice, either to opt for the new tax regime of 22% or continue the old tax regime. There is no timeline within which the option of new tax rate can be exercised. However, rights once exercised cannot be withdrawn in subsequent years. Companies opting for new tax regime of 22% will not be subject to MAT provisions whereas companies opting for old tax regime would be subject to MAT provision, though MAT rate has been reduced to 15% (effective rate being 17.47%) from 18.50% (effective rate being 21.55%). Denial of MAT credit would costs heavily to some companies with higher MAT credit and it may be prudent for companies to continue the taxation under the old regime for little more time to utilize the available credit. There will be huge discrimination between the companies having MAT credit vis a vis companies without MAT credit. Tax impact would vary significantly in such cases.
As a result all recent amendments, there are different rates for different companies as under:
- All new manufacturing companies incorporated on or after 01.10.2019 will have effective tax rate of 17.16%. MAT will not be applicable to all such companies.
- All existing companies can opt for 22% tax rate (effective tax rate will be 25.16%). Such companies will also get immunity from MAT provisions.
- Companies who wish to avail the benefit of MAT credit, exemption, deductions will be normally subject to the effective tax rate of 29.12% or 34.94% depending upon its turnover and profitability. Further, MAT provisions would be applicable to all such companies.
Impact if company intends to avail the MAT credit:
- If company wish to have the benefits of all exemptions, deductions & MAT Credit, it can continue with the old taxation regime.
- Under old taxation regime, company with turnover
(a) Exceeding Rs. 400 crore: Tax will normally be @ 34.94% and liability on account of MAT at new rate will be @17.47%. The difference i.e., 17.47% will be eligible MAT credit.
(b) Not exceeding Rs. 400 Cr: Tax will normally be @ 29.12% and after MAT liability of 17.47%, the credit allowed will be @ 11.65% only.
- Net benefit to a company with MAT credit is that it will be able to take credit of 17.47 % (instead of 13.39% presently available) on the tax rate of 34.94%. Such companies will effectively save additional 4.08% of tax due to reduction in the MAT rate. To the extent of 4.08 %, there will be faster adjustment of MAT credit.
- After exhausting MAT credit, such company shall be eligible to opt for reduced tax rate of 22% (effective tax rate of 25.17%).
MAT credit is nothing but adjustment of tax paid in advance against future tax liability. It would have been better if MAT credit would have been allowed to the companies without any riders. It would not only have provided ease in business but would have enabled the companies to come out of the liquidity crunch in the economy.