Portfolio

India Inc may take a hit if Govt pushes MAT rate-cut to FY21

Vivek Ananth BL Research Bureau | Updated on December 02, 2019 Published on December 02, 2019

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Many firms had calculated lower tax outgo for H1, as suggested by Sept ordinance; Tax Bill tells a different tale

In just two months, the wan smile on India Inc has turned into a frown.

In September, Finance Minister Nirmala Sitharaman had announced a cut in the peak corporate tax rate from 30 per cent to 22 per cent, and the Minimum Alternate Tax (MAT) rate from 18.5 per cent to 15 per cent. Expecting both these changes to be applicable from FY20, companies had prepared the results for the first half of 2019-20 as per the new rates.

However, the Taxation Laws (Amendment) Bill, 2019, introduced in the Lok Sabha last week, says the lower MAT rate will be applicable only from FY21. Only the corporate tax rate cut is applicable from this financial year. For companies, this can increase the tax outgo for FY20 over and above what they had estimated in their half-yearly financials.

 

MAT is the minimum tax that profit-making companies have to pay if their tax liability is zero after claiming deductions and exemptions.

“This change from the ordinance was not expected, since the other beneficial provision — the lower corporate tax rate — is applicable from FY20,” says Neha Malhotra, Director, Nangia Andersen LLP.

Experts think that there could be a drafting error in the Bill, which may be rectified before it is passed. “The Tax Department is yet to clarify whether the lower MAT rate applies from the current financial year or the following year,” says Rohinton Sidhwa, Partner at Deloitte India.

“Assuming it’s the following year (FY21), then listed companies, which have adopted the lower rate in their half-yearly financials till September 2019, may have to restate once again at the higher rate.”

Change in earnings estimates

Many stock market participants and analysts had recalculated their estimated earnings growth for the current fiscal after the FM’s announcement in September, and stock prices had also moved up as a result. If the amended Bill does go through Parliament in its current form, these estimates for the larger listed universe of companies will have to be changed.

Companies may also have to restate their books for the October-December quarter if they had relied on the announcements contained in the ordinance passed in September.

For instance, IT services firms such as Infosys, TCS and HCL Tech, which get tax deductions and exemptions based on their export revenues, could get impacted. They could be liable to pay MAT because the deductions reduce their taxable income considerably.

Companies such as JSW Steel and Hindalco, which decided to continue with the old tax regime to get the MAT tax credit to set off current tax expenses, may now have to reverse the higher MAT credit availed in the half-year ended September.

Interest on advance tax

“There is a possibility that certain companies would have relied on the ordinance while paying their advance tax under MAT, which may lead to interest implications,” notes Nangia Andersen’s Malhotra, adding, however, that “Such reliance is misplaced as till the time a tax proposal is not passed by Parliament it doesn’t become law.”

The delay in the applicability of the reduced MAT rate could impact companies that have made their advance tax payments till date based on an expected lower tax outgo. They might have to pay interest on the difference.

This isn’t the first time that an announcement made by a Finance Minister has been changed when the Bill is introduced in Parliament. Sitharaman herself made an announcement in the Union Budget, in July, about weighted deductions for electric vehicle manufacturers investing in India, but this found no mention in the Finance Bill presented later.

Former Finance Minister Arun Jaitley had similarly removed from the Finance Bill references to taxation of provident fund at the time of withdrawal.

Published on December 02, 2019
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