## Tax Rates, Tax Holiday, and MAT
### Which Tax Rate to Use?
| Tax Component | Rate to Apply |
|---|---|
| Current Tax | Rate applicable to the current period |
| Deferred Tax | Future rate if announced/proposed by government in the current year; otherwise current year's rate |
Example:
Year 2024-25: current rate = 30%.
Budget 2024 proposes 35% for future years.
→ Current Tax: 30% | Deferred Tax: 35%
Using the correct future rate for deferred tax ensures the balance sheet reflects what will actually be paid when the timing difference reverses.
---
### Tax Holiday — Sections 80IA / 80IB
Certain companies enjoy a tax holiday under Sections 80IA or 80IB (e.g., infrastructure companies, new industrial units). During the holiday, income is exempt from tax.
The problem: A timing difference originating before the holiday might reverse during the holiday — when no tax is payable anyway. Creating a DTA for that reversal is meaningless.
AS 22 Rule:
> DTA in respect of timing differences that reverse during the tax holiday period should NOT be recognised.
FIFO Rule for Reversals:
> Timing differences that originate first are considered to reverse first (in chronological order).
Apply the FIFO rule to determine in which periods reversals fall. Only recognise DTA for the portion whose reversal falls outside the tax holiday period.
Timeline Illustration:
```
Periods: 1 2 3 4 5 6 7
Status: [HOL][HOL][HOL][TAX][TAX][TAX][TAX]
```
If a timing difference originates in Period 1 and reverses in Periods 2 and 3 (both still holiday) → no DTA.
If reversal extends into Period 4 onwards (taxable period) → DTA for only that portion.
---
### MAT (Minimum Alternate Tax) — Section 115JB
Where a company is subject to MAT:
- Compute Normal Tax (taxable profit × normal rate)
- Compute MAT (book profit × MAT rate, e.g. 7.5%)
- Current Tax = whichever is higher
- Deferred Tax is still calculated on normal tax timing differences using the normal rate
| Item | Value |
|---|---|
| Taxable profit × 20% | = Normal Tax |
| Book profit × 7.5% | = MAT |
| Current Tax | = Higher of the two |
| Deferred Tax | Computed on timing differences @ 20% (normal rate only) |