A CA sat across from his client, the CFO of a manufacturing company, with a spreadsheet showing ₹85 crore in accumulated MAT credits. “So we can use this to offset our taxes over the next few years, right?” the CFO asked. The CA paused. “That’s what we need to talk about. Budget 2026 just changed everything.”
If you’ve had this conversation, you’re not alone. Finance Bill 2026 has quietly restructured India’s corporate tax landscape under the cover of a modest rate cut.
The 1% Smokescreen
Budget 2026 cut MAT from 15% to 14%. Sounds good? Not really. This isn’t about the rate—it’s about what happened to the credit mechanism that made MAT bearable.
How MAT Used to Work
MAT was designed as a backstop to ensure profitable companies with lots of deductions couldn’t pay zero tax. But crucially, it was a timing difference, not a permanent cost.
The deal was simple: pay MAT when book profits were high but taxable income was low (due to depreciation or tax holidays), get a credit, and set it off when regular tax exceeded MAT in future years. You’d eventually recover what you paid. It was advance tax—pay now, adjust later.
This made MAT tolerable for capital-intensive businesses, SEZ units, and infrastructure companies. They paid MAT during lean years but recovered it once profits kicked in.
What Just Changed
Budget 2026 flipped the script. MAT is now a final tax.
From April 1, 2026, no new MAT credits accrue. If you pay MAT, you’re not getting it back. The recovery mechanism? Gone.
What about existing credits? If you’re moving to the 22% regime, you can use old credits—but only up to 25% of your tax liability per year, within the 15-year window.
Do the math. With ₹100 crore in credits and ₹50 crore annual tax liability, you can only set off ₹12.5 crore yearly. You’d need eight years to exhaust credits—assuming constant liability and no time expiry.
For companies staying in the old regime? The door is shut. MAT becomes final with no meaningful carry-forward.
The SEZ and Infrastructure Hit
This gets painful for SEZ and infrastructure companies with tax holidays—100% or 50% income exemptions. Even with holidays, they paid MAT on book profits. The consolation? Carry forward credits for use post-holiday.
Under new rules, that’s gone. You’ll still pay MAT during holiday years, but it’s now permanent. The promised tax holiday? Effectively diluted. As one expert noted, it’s “a permanent difference that takes away the benefit of the tax holiday.”
Who Wins, Who Loses?
Firms with years under tax-incentivized structures—SEZs, infrastructure, capital-intensive manufacturing—have substantial credits. The new rules create “use-it-or-lose-it” with a cap making full recovery unlikely.
Newer companies or those with smaller credits may find the 22% regime attractive—lower rate, simplified compliance, no stranded credit worries.
The Bigger Picture
The government simplifies the framework and nudges companies toward the new regime, addressing indefinite credit accumulation and administrative burden.
The trade-off? Companies made investment decisions based on credit recoverability. Now they hold stranded balance sheet assets. Capital-intensive sectors—those the government wants to promote through ISM 2.0 and Biopharma SHAKTI—face permanent effective tax rate increases.
What This Means for Practice
We’re helping clients navigate fundamentally altered terrain. Regime migration arithmetic just got complicated. Model tax liability under both regimes for 5–10 years, factor in the 25% cap, assess time value of money.
For clients with large credits, staying in the old regime may make sense near-term despite higher rates. For others, the 22% rate may outweigh credit loss.
One certainty? That spreadsheet showing accumulated MAT credits isn’t worth what it used to be. Your clients need to know—sooner rather than later.
