MAT on SEZ - P&L neutral; cash flow negative: Edelweiss

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��

Budget 2011 announced the levy of MAT on SEZ developers and units operating under SEZ, clouding sentiments on account of the expected increase in tax burden. However, in our view the implication may not be true for many companies as they may still continue to be outside MAT at the entity level or even in some cases where it is applicable, the impact may be restricted to only cash flow and not P&L.

MAT applicable only when book profit of overall company is lower than 18.5% of book profit

Under the amended provisions of Section 115JB of the Income Tax Act, a company is required to pay MAT on its book profit if income tax payable on the total income is less than 18.5% of book profit.

The income tax payable for the applicability of MAT, however, needs to be looked from the overall company perspective and not from the perspective of its individual business units. So, in a case where a company has three business units, of which one is a SEZ developer/ unit operating under SEZ, we need to look at the aggregate profit of all three units to decide whether the company will fall under MAT.

Hence, in case of companies which have SEZ units along with normal tax paying business units, wherein overall tax paid is already higher than 18.5% of book profit, there will not be any incremental cash flow or P&L impact on account of MAT on SEZ units.

Incremental MAT will be restricted to the difference between current tax rate and MAT rate

For companies wherein current tax paid is lower than 18.5%, the incremental MAT outflow will be only to the extent of the difference between MAT rate and current tax rate. For example, if a company is already paying tax @ 10% of book profit, the maximum impact due to MAT applicability on SEZ units will be around 8.5% (refer annexure I for details).

MAT permitted to be carried forward to be set off against future taxes

A company falling under the ambit of MAT is allowed to carry forward MAT credit for a period of 10 years following the year in which MAT has been paid.

MAT credit = MAT – normal income tax

MAT credit can be set-off only in the years when the normal income tax is higher than MAT and the set-off is restricted to the difference between normal income tax and MAT.

MAT credit to be recognised as an asset; hence, may not have P&L implications

As per the guidance note issued by ICAI, India Inc., can recognise “MAT credit” as an asset under loans and advances. The corresponding credit will be to P&L, which will neutralise the incremental impact of increase in MAT rates on reported earnings.

However, the under-mentioned conditions are required to be met to recognise MAT credit:

n  There is convincing evidence that the company will pay normal income tax during the specified period (next 10 years).

n  There will be sufficient future taxable income to absorb MAT credit.

Hence, in cases where MAT is due to some tax exemption and the remaining period of tax exemption is less than 10 years, the increase in MAT rates should not have any impact on reported earnings. However, cash flow will be negatively impacted on account of higher cash taxes