The Government has implemented several profit-associated deductions and incentives in order to stimulate investment in diverse businesses. Taxpayers who are eligible for such deductions/incentives will either become zero-tax firms or will pay marginal tax notwithstanding their ability to pay regular tax. The government also requires a regular/consistent inflow of tax income, which is one of its key sources of revenue, in order to cover various expenses for the country’s welfare. As a result, the concept of Minimum Tax was developed to ensure that the objective of creating such incentives/deductions was not completely disrupted by taking them away indirectly, as well as to ensure that tax was levied on such zero tax/marginal tax enterprises.
This was first introduced for businesses under the moniker ‘Minimal Alternate Tax (MAT)’ to collect the minimum tax owed by businesses claiming profit-related deductions in financial years (FYs) where the normal tax payable is less than MAT. For MAT, adjusted total income will be calculated by adding and subtracting specific items. The adjusted income is then taxed at a rate that is lower than the usual rate.
Credit for MAT paid in previous years, on the other hand, was allowed to be carried forward and set off in a later year where the usual tax payable was more than the MAT. The Alternative Minimum Tax (AMT), which was implemented for non-corporate taxpayers, is based on the same principles. However, when compared to MAT, the applicability, method of calculating adjusted income, exemption, reporting requirements, and so on are all different.
Alternative Minimum Tax – Basics
- Alternative Minimum Tax – Basics
- Applicability of AMT
- Exemption from Applicability of AMT
- Calculation of Adjusted Total Income
- Computation of Tax Liability When AMT Provisions are Applicable
- AMT Credit
- Reporting Requirement
- Visualization (assuming the status of the taxpayer to be individual) Quantity (in Rs)
AMT stands for Alternative Minimum Tax, which is a leviable alternative to the regular tax. The AMT rate is 18.5 percent (plus applicable surcharge and cess). Alternative Minimum Tax is a tax imposed on ‘adjusted total income’ in a fiscal year (FY) in which the tax on regular income is lower than the Alternative Minimum Tax on adjusted total income. As a result, AMT must be paid by taxpayers who are subject to AMT rules, regardless of their regular tax obligations.
Applicability of AMT
As previously stated, the concept of a minimum tax was first introduced for corporations and then gradually extended to non-corporate taxpayers. The Finance Act of 2011 introduced the Alternative Minimum Tax (AMT) on Limited Liability Partnerships (LLPs), and the Finance Act of 2012 revised the provisions to what they are now. As a result, the Alternative Minimum Tax provisions apply to the following taxpayers:
- All taxpayers who are not corporations; and
- Taxpayers who have claimed a deduction under the following categories:
- Chapter VI-A, “C. — Deductions in respect of certain incomes” – These deductions are provided in respect of profits and gains of specific industries such as hotel business, small scale industrial undertaking, housing projects, export business, infrastructure development, and so on, and are provided under Section 80H to 80RRB. However, the deduction under Section 80P, which applies to co-operative societies, is not applicable for this purpose. or
- Deduction under Section 35AD – While capital expenditures in assets usually qualify for year-on-year depreciation, capital expenditures incurred for specified businesses, such as the operation of a cold chain facility, fertilizer production, and so on, are eligible for a 100 percent deduction under this section.
- Profit-linked deduction under Section 10AA — Profit deductions ranging from 100% to 50% are available to units in Special Economic Zones (SEZs).
On the basis of the foregoing, it can be argued that AMT requirements only apply to non-corporate taxpayers with income classified as “Profits or Gains of Business or Profession.” Furthermore, as previously stated, AMT rules apply only where the normal tax payable in a given fiscal year is less than the AMT.
Exemption from Applicability of AMT
Individuals, Hindu Undivided Families (HUFs), Associations of Persons (AOPs), Bodies of Individuals (BOIs), and artificial juridical persons with an adjusted total income of less than Rs 20,00,000 are exempt from the AMT. As a result, Limited Liability Partnership, partnership businesses, and other non-corporate assessees are not eligible for this exemption based on a monetary threshold of adjusted total income.
Calculation of Adjusted Total Income
The following is how adjusted total income and AMT are calculated:
|Particulars||Amount (in Rs)|
|Taxable income (A)||XXXXX|
|Add: Deduction claimed if any under Chapter VI-A from 80H to 80RRB except 80P (B)||XXXXX|
|Deduction claimed if any under Section 10AA (C)||XXXXX|
|Deduction claimed if any under Section 35AD reduced by regular depreciation allowed (D)||XXXXX|
|Adjusted total income (E) = (A)+(B)+(C)+(D)||XXXXX|
|AMT – 18.5% of (E)||XXXXX|
Computation of Tax Liability When AMT Provisions are Applicable
|Particulars||Amount (in Rs)|
|Tax liability computed as per normal provisions of the Income-tax Act – normal tax liability||XXXX|
|AMT computed at 18.5% (plus applicable surcharge and cess) on adjusted total income||XXXX|
|Tax liability of the taxpayer||Higher of the above|
Though the Alternative Minimum Tax (AMT) was enacted to collect taxes from tax-exempt businesses, it was also designed to provide a steady flow of revenue to the government. As a result, while minimum tax is imposed in an FY where normal tax is lower than AMT, AMT paid earlier is allowed to be carried forward and lowered against normal tax to the extent of the difference between normal tax and AMT in consecutive FYs when AMT is lower than normal tax. Any remaining balance after such a set-off can be carried forward to future fiscal years. AMT Credit is the name for this notion.
However, AMT Credit can only be carried forward for up to 15 fiscal years from the year in which the AMT is paid. If the regular tax rate changes as a result of an order issued by the IRS, the AMT credit will change as well. Furthermore, any FTC in excess of AMT will be ignored if the taxpayer has any foreign tax credit (tax paid in foreign countries with which India has a bilateral or unilateral tax agreement).
All taxpayers subject to the AMT must acquire a report from a Chartered Accountant in Form No. 29C stating that adjusted total income and AMT have been computed in accordance with the rules of the Income-tax Act, and submit the report on or before the due date for filing the return of income. Along with the income tax return, the report can be filed electronically.
Visualization (assuming the status of the taxpayer to be individual) Quantity (in Rs)
|Particulars||FY 1||FY 2|
|Taxable income (A)||19,30,000||20,50,000|
|Add: Deduction claimed if any under Chapter VI-A from 80H to 80RRB except 80P (B)||1,00,000||Nil|
|Deduction claimed if any under Section 10AA (C)||75,000||25,000|
|Deduction claimed if any under Section 35AD reduced by regular depreciation allowed (D)||4,50,000||Nil|
|Adjusted total income (E) = (A)+(B)+(C)+(D)||25,55,000||20,75,000|
|Comparison of normal tax and AMT|
|AMT – (18.5% of (E) plus education cess @ 3%) (F)||4,91,582||3,99,230|
|Tax liability computed as per normal provisions of the Income-tax Act – normal tax liability as per applicable slab for individual including education cess (G)||4,07,160||4,44,600|
|Tax liability of taxpayer – (H) = Higher of (F) and (G)||4,91,582 (AMT being the tax liability, AMT can be c/f to next FY for set-off if any)||4,44,60|
|Less: MAT Credit b/f (restricted to an excess of normal tax over AMT)
As only Rs 45,370 (Rs 4,44,600-3,99,230) is claimed in FY 2 out of total AMT credit of Rs 84,422 balance unclaimed AMT credit of Rs 39,052 can be carried forward for set-off till next 15 financial years
|Final tax liability of taxpayer (rounded off)||4,91,582||3,99,230|