In a bid to provide taxation relief to the companies facing corporate insolvency proceedings, the Income Tax Department has decided to relax norms for levy of Minimum Alternate Tax (MAT) from the current financial year 2017-18. The government will now allow such companies to reduce the amount of total loss brought forward including unabsorbed depreciation from the book profit for the purposes of levy of MAT under section 115JB of the Income-tax Act, the Central Board of Direct Taxes (CBDT) said in a statement.
The legislative amendment enabling these changes will be made “in due course”, the statement said. The changes are likely to be brought in as part of the Finance Bill in the upcoming Budget, an official said.
The CBDT said that various representations were received from various stakeholders on this issue relating to the companies against whom an application for corporate insolvency resolution process has been admitted by the Adjudicating Authority under section 7 or section 9 or section 10 of the Insolvency and Bankruptcy Code (IBC), 2016.
“With a view to minimise the genuine hardship faced by such companies, it has been decided, that, with effect from Assessment Year 2018-19 (i.e. Financial Year 2017-18), in case of a company, against whom an application for corporate insolvency resolution process has been admitted by the Adjudicating Authority under section 7 or section 9 or section 10 of the IBC, the amount of total loss brought forward (including unabsorbed depreciation) shall be allowed to be reduced from the book profit for the purposes of levy of MAT under section 115JB of the Act,” the CBDT said.
As per Section 115JB of the Income Tax Act, MAT is levied on book profit after deducting the amount of loss brought forward or unabsorbed depreciation, whichever is less. Under existing income tax guidelines, a company has to pay tax on the haircut taken by lenders as this results in a notional profit on the books of the company being bought. Many stakeholders had raised concerns that this results in increase in the effective price of the purchase, which would have an impact on the bidding process for the debt-ridden companies at National Company Law Tribunal (NCLT).
The number of cases being filed for corporate insolvency resolution process (CIRP) under the Insolvency and Bankruptcy Code enacted in May 2016 has been rising. The RBI data shows that as on November 2017, over 4,300 applications under CIRP were filed in the various benches of the NCLT.
While resolution plans have been approved in 6 cases so far, a total of 19 cases have been closed by liquidation. In 25 of the cases, the admission of the cases to the NCLT have been set aside by the orders of appellate authorities including the National Company Law Appellate Tribunal and the the Supreme Court. The IBC also allows the operational creditors such as trade suppliers, employees, or workmen, to initiate insolvency resolution against companies. The data shows that the operational creditors have been the most aggressive in the initiation of corporate insolvency proceedings, followed by financial creditors.
Out of the CIRP applications, more than 500 applications for admission have been rejected, dismissed or withdrawn, while 470 cases admitted by NCLT are at various stages of the insolvency process. Since the majority of these are the cases where the insolvent firm has been previously admitted under the then prevalent laws like Companies Act, Sick Industrial Companies Act (SICA), many cases were not pursued and became time- barred, the RBI said in a report last month.