Clarity on MAT awaited for IBC cases

ARCs also expect some relief on the GST charged on management fee

In a bid to provide tax relief to companies under the Insolvency and Bankruptcy Code for resolution, the Income Tax Department recently decided to relax norms for levy of Minimum Alternate Tax (MAT) from the current financial year (2017-18).

This move is intended at addressing the industry-wide demand for MAT exemption on notional profit arising from debt waiver under IBC.

The legislative amendment enabling these changes are likely to be brought in as part of the Finance Bill in the upcoming Budget. Besides this, the industry is also awaiting more clarity and respite on the taxation front.

As per the circular issued by the Central Board of Direct Taxes (CBDT), companies under IBC will be allowed to set off losses brought forward, including unabsorbed depreciation, from the book profit for levy of MAT under Section 115JB of the IT Act. This is no doubt a relief from the earlier tax provisions where MAT is levied on book profit after deducting the amount of loss brought forward or unabsorbed depreciation, whichever is less.

Siby Antony, Chairman, Edelweiss ARC, explains: “If there is a corporate borrower with a debt outstanding of, say, ₹45,000 crore. Let us say that a buyer bids for ₹25,000 crore. As per the earlier MAT provisions, the difference (extinguishing of liability) ₹20,000 crore would have been treated as notional profit and the buyer would have to pay MAT on it. This would have depressed the value of bids.” Under the recent amendment by CBDT, if the company has carry forward losses to the tune of ₹20,000 crore, then this can be set off against the notional profit, in effect providing relief under MAT provisions.

But this does not satisfy the demand of the industry for full waiver of tax on such notional gain irrespective of brought forward losses, says Siby Antony.

“In the above case, if the brought-forward losses are less than the ₹20,000 crore of notional gain, then MAT will still be levied on the remaining portion. We expect more clarity on this in the Budget. In BIFR (Board for Industrial and Financial Reconstruction) it was given total waiver.”

The ARC industry is also expecting some relief on the GST charged on the management fee. Currently, when an ARC acquires an asset, it creates a trust to take on the asset. One trust can have a bulk of bad loans. The trust issues security receipts to the selling banks as well as other investors.

“As recoveries happen, the management fee is paid to ARCs from the trust. GST of 18 per cent on this fee, in effect, leads to leakage of recoveries to banks,” explains Antony.

GST levied on the management fee has become a meaningful amount. “At Edelweiss ARC, we may end up paying about ₹100-150 crore as GST for the current fiscal,” adds Antony.

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