The Hindu Business Line : Clarification not to impact MAT outgo, say IT firms

New Delhi/Chennai, March 7 The Union Budget has made an amendment involving add-back of deferred tax, DDT and interest on income tax to book profits for computing Minimum Alternate Tax (MAT) but Indian IT companies claim that the clarification will have virtually no impact on their MAT outgo.

The Finance Bill has made a clarification pertaining to Section 115JB proposing that the amount of deferred tax and the provisions, if debited to the profit and loss account, need to be added back to the book profits, while calculating MAT (with tax rate of 11.33 per cent).

“There is no impact on us. The law talks about book profits for the purpose of MAT and there was some ambiguity on how to compute the book profits. The amendments have only made it very clear. We always compute the book profits by starting with PBT, and not PAT,” Mr V Balakrishnan - Chief Financial Officer of Infosys Technologies said.

Echoing similar views, Polaris Software Labs pointed out that the company would not see any impact as a result of the amendment. “We have always taken PBT as the book profit for calculation of tax - that means, profit before all taxes, including dividend distribution tax. The amendment is meant as a clarification, possibly to companies who have deducted dividend distribution tax from the profits before they calculated MAT,” Mr R. Srikant, CFO of Polaris Software Labs, said.

Satyam Computer Services felt that the amendment was more “clarificatory” in nature. The fourth-largest software exporter said that neither MAT introduced last year nor the amendment this year had affected it. “We anyway pay tax in the US and our effective tax rate is about 13 per cent of PBT, which is higher than the MAT we have to pay,” Mr. V Srinivas, CFO, Satyam, said. Earlier too, Satyam had calculated MAT on profits before the DDT was calculated.

‘Misunderstood concept’

“Most often, MAT and its impact on IT companies is a misunderstood concept. There is a credit available for MAT paid, against any future tax liability on the taxable income. Therefore, any increase in MAT will only reflect as a deferred tax credit and hence any immediate P & L impact is neutralised,” said Mr N. Ramachandran, CFO, iGATE Global Solutions. He added that the company had always understood Book Profits to mean its general connotation - the starting point of which is Profits Before Tax. “Going by this principle, we have never deducted Dividend Distribution Tax or Deferred Tax (because it is also a tax) for our computation of book profits. Hence, this amendment does not impact us at all,” Mr Ramachandran, said.

Mr Bharat Varadachari, Partner, Global Tax Advisory Services, Ernst & Young, pointed out that the incremental MAT liability in case of certain companies may only be for a period of two years. “This, at most, will be a short-term cash flow issue. With the tax holiday sunset clause of March 2009, the MAT outflow will be creditable post-2009 against the normal tax liabilities,” he said.

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