Depending on its capex cycle, a company can choose between existing tax rates with payment of MAT or, the reduced corporate tax.
The announcement by Finance Minister Nirmala Sitharaman to reduce corporate tax will have a 'big sentimental impact', and also gives companies the flexibility of choosing between tax structures, said a top executive at JSW Steel, the leading steelmaker in the country.
"The total quantum of tax foregone is Rs 1,45,000 crore and that is a big booster for the economy," Seshagiri Rao, Jt Managing Director & Group CFO, told Moneycontrol.
Explaining the choice for companies, especially for capital-intensive ones, Rao said: "Any capital intensive company will have to weigh in their options between going for existing tax rates with payment of MAT or, the reduced corporate tax."
At present, the corporate tax rate has come down to 22 percent, from 30 percent earlier. And the effective tax rate has come down to 25.17 percent, from 35 percent earlier.
In terms of Minimum alternate tax (MAT), it has been reduced to 15 percent from 18.5 percent for companies continuing to avail exemptions and incentives. The effective tax rate will be 17.1 percent, down from 21.55 percent.
If a company, which was paying MAT, uses this new corporate tax structure, then its effective tax outflow will increase by 3.17 percent.
But if the company continues to take benefits and decides to pay MAT with the applicable existing normal tax rate, then the cash outflow will be 17.1 percent, and not 21.55 percent. So its tax outflow will reduce.
"Besides, the company will have to check over how many years it will have to pay the deferred tax, which is the difference between the MAT and normal corporate tax. If the payment of deferred tax liability will come over seven to 15 years (depending on the capex programme), then the present value of tax may be lower than 25.17 percent, including the MAT of 17.1 percent," said the industry veteran.
On the other hand, if the capex cycle gets over in just three years, then the company may choose to pay the corporate tax, and not MAT.
While it may be no-brainer as to which tax rate a capital intensive company will choose, it is not that easy.
Boost for small projects
The tax benefit for new companies - those incorporated after October 1 - will spur the execution of small projects, said Rao.
For these companies, the Finance Minister announced tax rate of 15 percent, with an effective rate of 17.01 percent, including cess and surcharge.
"For smaller companies, which entail investment of Rs 3,000 crore to Rs 5,000 crore, this is a huge incentive. For these companies the tax rate will be 17.01 percent," said Rao.
The incentive works for smaller projects as the tax rate will apply only if the project gets over by March 2023."These projects can be completed within four-and-a-half years. But for bigger projects, to complete them and then commission them, the time frame will be difficult," added Rao.The Great Diwali Discount!
Unlock 75% more savings this festive season. Get Moneycontrol Pro for a year for Rs 289 only.
Coupon code: DIWALI. Offer valid till 10th November, 2019 .