Minimum alternative tax exemption: investing in troubled companies is worthwhile

The exemption from the payment of the alternative minimum tax (MAT) for companies opting for the new corporate tax structure, could make it more attractive to invest in troubled companies subject to an insolvency resolution process. company, or CIRP.

One of the provisions inserted in the recent tax changes gives the possibility to national companies to pay a tax at the rate of 22% (the effective rate is 25.17%, surcharge and tax included) subject to not benefiting from any tax. exemption or inducement. . In addition to this, these companies are also not required to pay accounting profit tax as required by the MAT regime.

While this affects all domestic businesses, exempting MAT payment could help speed up resolution of troubled businesses in particular. According to Anish Shah, Director (Transaction Tax, Tax & Regulatory Services), BDO India, there are cases of companies in difficulty where the accounting losses and unabsorbed depreciation they have are not sufficient compared to the takeover that these companies must incur on account of the discount practiced by financial creditors and others. In such situations, MAT involvement in the hands of these companies could arise.

For example, if lenders took a 40% (Rs 40 crore) haircut from a Rs 100 crore exposure to a distressed business, that Rs 40 crore would usually be credited to the company’s profit and loss account. Thus, if there are no losses carried forward to compensate, all of these 40 crores could be subject to the MAT. However, if this company opts for exemption from the MAT, provided for by the new amendment, the recovery is no longer subject to the MAT.

However, this advantage is only available for companies in difficulty where the effect of the credit recovery is given in the current financial year, and not the cases previously resolved. Shah said one of the reasons resolutions are being delayed is also due to MAT or the tax liability that would result from acquiring these companies. “With this exemption, investors will be relieved not to put money to pay taxes to the government, but rather the money can be used for its recovery,” he said.

Ideally, businesses are required to pay tax on taxable profit. For the calculation of taxable profit, certain additions and deletions are made in accounting profit. However, due to certain tax exemptions, if any, or the carry-over of tax losses, the company’s tax profit could be reduced to zero. Yet these companies are required to pay taxes at least on their book profit, called MAT.