The government has given relief to minimum alternate tax (MAT)-paying companies, which were calculating the depreciation of assets using their own judgment.

The old Companies Act, 1956 did not specify the life of an asset, forcing companies to make that judgment on their own. Even though the new companies Act clearly mentioned the life of various assets used by companies, MAT-paying companies were apprehensive that if the ‘useful life’ of an asset exhausted under the new companies Act but not according to what they had specified, would their tax liability increase.

‘Useful life’ is the time period during which the asset will be useful to the business concerned.

In order to clear the air, the corporate affairs ministry last week tweaked the rules for depreciation of assets whose ‘useful life’ exhaust under the definition of new Companies Act.

As a result, if a company has an asset that has no ‘useful life’ according to the new Companies Act, it can still carry the value of the asset in their profit and loss (P&L) account.

Take, for instance, a company that takes the life of an asset worth Rs 100 to be 10 years and deducts depreciation at the value of Rs 10 a year in its P&L account, but the ‘useful life’ of this asset is seven years under the new Companies Act. According to the tweaked norms, the firm can still carry Rs 30 in its P&L account in the remaining three years and charge depreciation as earlier – a facility not available before.

When the new Act was enacted, this carrying value (Rs 30 in the above instance) was supposed to be kept in the opening reserves of a company in a financial year and not in the P&L account.

MAT has to be paid on the profit shown in P&L account. Companies that make high profits, but do not pay tax owing to various exemptions, have to pay MAT. According to Sai Venkateshwaran, partner and head of accounting advisory services at KPMG in India, companies “would be able to charge the additional depreciation as per these transitional provisions to the profit or loss account instead of adjusting it directly to the reserves”.

With the recent rules, the government has left it to the companies if they are willing to show some losses in order to save some MAT.

“If the company has been paying MAT, then they will like to exercise the option of additional depreciation from the P&L account,” said Ashish Gupta, partner in Walker Chandiok & Co LLP.

The article appeared in Business Standard. The article can be found here.