Budget's MAT Overhaul May Trigger One-Time Financial Hits for Select Companies
The Union Budget's effort to accelerate corporate migration to India's new low-tax regime may deliver a one-time financial blow to several companies remaining in the old tax system. Restrictions on tax credits under the Minimum Alternate Tax (MAT) framework could compel startups and power sector enterprises to either transition to the new regime or face higher costs by staying put, according to tax experts and industry analysts.
Understanding the MAT Mechanism and Proposed Changes
Under the established old tax regime, companies must pay Minimum Alternate Tax at 15% of their book profits when their standard tax liability, after applying deductions, falls below this MAT threshold. Even if taxable income after exemptions is less than 15%, the MAT payment remains mandatory, with the difference provided as credits—known as deferred tax assets in accounting terminology—that can be utilized in subsequent financial years.
While reducing the MAT rate to 14%, the budget proposal seeks to prohibit businesses in the old regime from employing these set-offs in the future. Although set-offs continue under the new tax regime, their application has been strictly capped: a company can now utilize only 25% of its available tax credit in any given year.
Implications for Corporate Financial Health
This regulatory shift is expected to lead to partial or complete write-downs of MAT credits, potentially affecting profits and net worth for numerous businesses operating under the old tax framework. Experts warn that companies with substantial accumulated MAT credits or uncertain profit outlooks could experience one-time hits to earnings and increased volatility in effective tax rates.
"Companies involved in electricity generation, transmission, and distribution, which receive income tax deductions under section 80 IA (4) of the Income Tax Act, 1961, along with startups benefiting from tax exemptions under section 80 IAC, must carefully evaluate whether transitioning to the new tax regime from April 1 makes strategic sense," explained Ved Jain, former president of the Institute of Chartered Accountants of India.
Jain further clarified, "The budget proposal does not mandate any company to switch regimes, but businesses must assess which framework proves more advantageous considering the proposed amendments. If they opt for the new regime, they gain the benefit of offsetting up to 25% of future tax liability using MAT credits."
Accounting and Reporting Challenges
The MAT rationalization not only alters corporate tax liabilities but also significantly impacts financial statement reporting. This requires meticulous judgment under accounting standard Ind AS 12 and ICAI guidance notes to ensure that recognized balances accurately reflect the changed economic reality of MAT credit utilization.
"Management teams should, based on their decision regarding transitioning to the new tax regime or continuing under the existing framework, reassess assumptions surrounding deferred tax assets, including MAT credits, and evaluate whether sufficient convincing evidence exists to support their recoverability," stated Amit K. Agarwal, partner and leader of accounting advisory at BDO India.
Agarwal added, "Where recovery appears doubtful, partial or full write-downs may become necessary, accompanied by enhanced disclosures of key judgments and estimates."
Historical Context and Future Outlook
MAT was introduced broadly in its current format during the 1996-97 budget by then Finance Minister P. Chidambaram to address the issue of companies reporting substantial book profits while maintaining minimal tax liability through various deductions and exemptions.
The Union Budget for FY27 proposes that from April 1, 2026 (tax year 2026–27), MAT will be recharacterized as a final tax in the old regime, with no new MAT credits accruing for payments made from this date forward. This continues the government's phased approach to eliminating existing tax incentives under the old regime, encouraging business migration to the new system.
Despite the new tax regime offering lower rates, many companies have remained in the old framework until their multi-year tax breaks expire from specific cut-off dates. The legislative changes effectively diminish the economic value of unused MAT credits, creating complex financial planning challenges for affected corporations across sectors.
