Foreign Tax Credit for Minimum Alternate Tax and Alternate Minimum Tax

February 9, 2017 4402 Views
Yogesh Shah
Partner with Deloitte Haskins & Sells LLP
Kaushali Jain
Deputy Manager, Deloitte Haskins & Sells LLP
Aparna Parelkar
Aparna Parelkar Senior Manager, Deloitte Haskins & Sells LLP.

MAT: "Minimum Alternate Tax" or "Maximum Aversion Tax":

You read it correctly, MAT is gradually becoming Maximum Aversion Tax because of variety of reasons. If one checks history, MAT is the most disliked tax. It was introduced to collect tax from exempted assessees having book profits and then enlarged to Special Economic Zones including increase in the rate from 7.5% to 20%. In fact, many SEZ units / developers filed various petitions to challenge MAT taking support of doctrine of promissory estoppel. However, they were unsuccessful.

In Union Budget 2017, once again a proposal has been introduced which takes away some benefit from tax payers. In view of the roadmap of gradual decrease in corporate tax given by the Hon'ble Finance Minister, the expectations of reduction in MAT were high in this budget. However, rather than decreasing the MAT rate, the time limit for carry forward and utilization of MAT credit has been increased from 10 to 15 years. The reason to increase the period seemed imminent considering reduction in gap between MAT rate (20%) and Corporate tax rate (25% for Companies having turnover less than INR 50 crore in FY 2015-16).

MAT/AMT& Foreign Tax Credit:

Even in times of economic integration, fiscal jurisdiction is the most fiercely guarded jurisdiction of any nation, resulting in double taxation of income, which remains a major obstacle in the development of inter-country economic relations.

Payment of taxes in the overseas jurisdiction, over and above the taxability in home jurisdiction, is an inevitable consequence of the inherent conflict between the source rule and residence rule of taxation. The residence rule taxes a person who is resident of a tax jurisdiction irrespective of the geographic location of the place where the income has been earned. Source rule, on the other hand, taxes the income earned in its jurisdiction irrespective of the residential status of the person earning the said income. Thus elimination of double taxation becomes very important.

Section 91 of The Income-tax Act, 1961 ("the Act") provides for relief in respect of taxes paid in a country with which there is no agreement under section 90. The Double Taxation Avoidance Agreement ('DTAA/ tax treaty') entered into under sections 90/90A generally contain a separate Article relating to methods to eliminate double taxation. Most DTAAs entered into by India follow the credit method.

In June 2016, CBDT introduced Foreign Tax Credit (FTC) rules vide Notification No. 54 of 2016 dated July 27, 2016 which will come into effect from 1 April 2017. Rule 128 of The Income-tax Rules, 1962 deals with the manner of computation of FTC.

In this budget, a new proposal in line with Rule 128 has been introduced to restrict the carry forward of MAT/AMT credit. Inthe existing provisions, it is possible to carry forward the difference between the tax paid under MAT/AMT and the tax computed under the normal provisions as credit for future years and be set off against tax payable under normal provisions. However, as per the new regulations, MAT/AMT credit will not be allowed to be carried forward to the extent that the amount of FTC that can be claimed against MAT/AMT exceeds the amount of FTC that is claimable against tax computed under the normal ITA provisions. The amendment will apply in relation to AY 2018-19 and subsequent years.

Rule 128(6) provides that in case of MAT/AMT liability, FTC would be allowed in the same manner as is allowable against tax payable under the normal provisions. In the cases of ACIT v. L&T [ITA No. 4499/MUM/2008 ] (BCAJ) and DCIT v. Subex Technology Ltd. [2015] 63 taxmann.com 124 (Bangalore ITAT), FTC was granted against MAT liability.

Rule 128(7) provides that when FTC against MAT/AMT liability exceeds FTC against tax payable under normal provisions, such excess would be ignored while computing credit under section 115JAA or section 115JD.

Let us understand this with two examples:

Example I – A Ltd has earned income from Singapore on tax has been withheld in Singapore to the extent of INR 75,000. This is exempt under Section 10AA of Income Tax Act, 1961. However, tax as per MAT comes to INR 1,00,000.

Example II – Considering that everything else remains same, let's assume that the above income is dividend income and tax as per Income Tax Act, 1961 comes to INR 50,000.

(Amount in INR)
  Example I Example II
Particulars Existing provisions Proposed amendment Existing provisions Proposed amendment
Tax under normal provisions (A) Nil Nil 50,000 50,000
Tax under MAT (B) 1,00,000 1,00,000 1,00,000 1,00,000
Tax withheld in foreign country 75,000 75,000 75,000 75,000
Tax liability for the year (A or B whichever is higher) 1,00,000 1,00,000 1,00,000 1,00,000
FTC utilised against MAT liability (C) 75,000 75,000 75,000 75,000
FTC against tax payable under normal provisions (D) Nil Nil 50,000 50,000
Mat credit allowed as per section 115JAA

1,00,000

(B-A)

25,000

[(B-A)-(C-D)]

50,000

(B-A)

25,000

[(B-A)-(C-D)]

It is interesting to note that whenever any income was taxed at a lower rate of tax under normal provisions then there was bound to be MAT credit which was earlier never equated with FTC.In the existing provisions it is possible to carry forward higher MAT credit if the income was not taxed under normal provision i.e. (B-A) and now the benefit gets restricted because of adjustment of FTC i.e. [(B-A)-(C-D)]. Continual amendments in MAT may make it Maximum Aversion Tax instead of Minimum Alternate Tax. Possibly, now the assessees may not declare dividends to the Indian Company from their overseas subsidiaries, if MAT is being paid by the Indian Company.

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