MAT relief for companies facing insolvency may kindle investor interest

The move to relax norms for levy of Minimum Alternate Tax (MAT) on companies facing corporate insolvency proceedings, as announced in the Budget, is likely to kindle investors’ interest in acquiring controlling stake in such companies.

According to Section 115JB of the Income Tax Act, MAT is levied on book profit after deducting the amount of loss brought forward or unabsorbed depreciation, whichever is less.

The Finance Bill 2018 has clarified that in computing MAT in case of a company whose application for corporate insolvency resolution under the Insolvency and Bankruptcy Code 2016 has been admitted by the Adjudicating Authority, an aggregate amount of unabsorbed depreciation and loss brought forward (excluding unabsorbed depreciation) shall be allowed to be reduced from book profits.

Consequently, such companies would be entitled to reduce the loss brought forward (excluding unabsorbed depreciation) and unabsorbed depreciation for the purpose of computing Book Profits under MAT. The relaxed norms will be effective from April 1 and will accordingly apply in relation to assessment year 2018-19 and onwards.

“The measure announced in the Budget will help motivate and revive insolvent companies,” Dinesh Agarwal, Partner, Tax & Regulatory Services, Enrst & Young LLP told BusinessLine .

There has been a rise in the number of cases being filed for corporate insolvency resolution process (CIRP) since the enactment and notification of relevant provisions in December 2016.

As per information available in the quarterly newsletter of Insolvency and Bankruptcy Board of India (IBBI), close to 2,434 fresh cases were filed and 2,304 cases of winding up of companies were transferred from various High Courts. Of the total, 2,750 cases were disposed while 1,988 are pending as of November 2017.

As of end- December, 461 corporates were undergoing resolution process. Further, CIRPs have resulted in 10 resolutions and 30 liquidation, the IBBI newsletter said.

The Budget provision allowing companies under bankruptcy to set off losses brought forward, including unabsorbed depreciation, from the book profit for levy of MAT, can offset the notional profit arising from the debt haircuts and aid in the resolution, Atanu Mukherjee, President, MN Dastur & Co, said.

“In effect the provision acts as a tax waiver on the notional profit , thus making the acquisition more attractive at original valuations, than with no waiver at all,” he pointed out.

Tax waiver only partial

However, the carry forward loss may or may not entirely offset the notional profit due to debt haircuts; it will be determined on the basis of the amount of haircut vis-a-vis the amount of carry forward loss. This would mean that the tax waiver could turn out to be ‘partial’.

“To the extent that the debt haircut exceeds the amount of carry forward loss that can be applied, tax will accrue on the difference. In that case it is likely that the acquiring company will revise its valuation downwards commensurately to accommodate the tax on the difference,” Mukherjee said.

According to Vinita Krishnan, Associate Director, Khaitan & Co, while a complete exemption from MAT would have been ideal, but this relief should help least debt ridden companies having substantial book losses.

“Any write off of loan or interest can get set-off against such aggregate book loss. We have already seen from the media reports, competitiveness increase in case of Electrosteel Steel where Tata steel has sought to bid afresh in view of clarity on this MAT relief,” she said.