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Foreign Tax Credit for Minimum Alternate Tax and Alternate Minimum Tax

Admin 2017-02-11

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 estoppels. 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.

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