The government has implemented several profit-linked deductions and incentives to promote investment across a range of industries. Even though they can pay regular taxes, taxpayers who qualify for such deductions or incentives may become zero-tax companies or pay marginal taxes. The government also depends on the steady and consistent inflow of taxes, one of its primary sources of income, to pay for various costs related to the nation’s welfare. Thus, the idea of the minimum tax was introduced to ensure that the intention behind introducing such incentives/deductions was not completely undermined by taking them away indirectly and also to ensure the imposition of tax on such zero tax/marginal tax companies.
This was first made available to businesses under the name “Minimum Alternate Tax (MAT)” in order to collect the minimal amount of tax owed by those making profit-linked deduction claims during financial years (FYs) in which the normal tax due is less than the MAT. For MAT, adjusted total income will be calculated by adding and subtracting a few specific items. The adjusted income is then taxed at a rate that is lower than the standard rate of tax.
However, where normal tax payable was higher than MAT in a subsequent year, credit for MAT paid in prior years was permitted to be carried forward and set off. Similar ideas underlie the Alternative Minimum Tax (AMT in income tax), which was implemented for non-corporate taxpayers.
See also: Income Tax Act in India: Bare facts
AMT in income tax: Basics
As the name suggests, the AMT is a minimum tax that can be imposed as an alternative to the regular tax. The AMT rate is 18.5%. (plus applicable surcharge and cess). The AMT rate is 9% if the person is housed in an International Financial Services Centre (IFSC) and only receives income in convertible foreign currency.
In a fiscal year where the tax on ordinary income is lower than the AMT, the AMT is a tax imposed on “adjusted total income.” AMT must therefore be paid by those taxpayers to whom AMT regulations apply, regardless of regular tax.
see also: 206ab of income tax act
AMT in income tax: Applicability
The idea of the minimum tax was initially introduced for corporations and gradually extended to non-corporate taxpayers. AMT was first imposed on Limited Liability Partnerships (LLP) by the Finance Act of 2011, and the current provisions were changed by the Finance Act of 2012. Accordingly, the following taxpayers are subject to AMT provisions:
- All taxpayers who are not corporations, as well as taxpayers who have claimed a deduction under Chapter VI A’s ‘Deductions in respect of Certain Incomes’ section. These deductions are allowed under Sections 80H to 80RRB and apply to the profits and gains of certain industries, including those in the hotel industry, small-scale industrial undertakings, housing projects, export businesses, infrastructure development, etc. However, for this purpose, Section 80P deductions that apply to cooperative societies are not allowed.
- For deduction under Section 35AD, 100% of capital expenses incurred for specified businesses, such as operating a cold chain facility or producing fertiliser, are eligible for deduction. Normally, capital expenditures in assets are subject to annual depreciation.
- Units in ‘Special Economic Zones’ are provided with a deduction of profits ranging from 100% to 50% under Section 10AA, which is a profit-linked deduction.
The information above leads to the conclusion that non-corporate taxpayers who receive income under the heading “Profits or gains of business or profession” are the only ones to whom AMT provisions apply. Additionally, note that AMT provisions only apply when the normal tax due in a given FY is lower than the AMT.
AMT in income tax: Exemption from the applicability
A person, Hindu Undivided Family (HUF), Association of Persons (AOP), Body of Individuals (BOI), and artificial juridical person for whom the adjusted total income does not exceed Rs 20,00,000 is exempt from the application of the AMT provisions. Since LLPs, partnership firms, and other non-corporate assessees do not fall under corporations, they are not covered by this exemption based on a monetary limit of adjusted total income.
AMT in income tax: AMT credit
Although the AMT was implemented to deduct taxes from businesses that pay no taxes, it also aimed to ensure a steady stream of taxes to the public coffers. Therefore, while a minimum tax is charged in an FY where normal tax is lower than AMT, AMT paid in prior FYs is allowed to be carried forward and lowered against standard tax to the large extent of the difference between normal tax and AMT in subsequent FYs where AMT is lower than normal tax. Any remaining balance after such set-off may be carried over to succeeding fiscal years. AMT Credit is the name given to this idea.
AMT Credit, however, may only be carried ahead for a maximum of 15 fiscal years (FYs) after the FY in which this AMT is paid. AMT credit will adjust in accordance with any modifications to normal tax brought on by any orders made by the income tax department. Additionally, any FTC over the AMT will be disregarded if the taxpayer has any international tax credits (taxes paid in foreign nations in which India has bilateral or unilateral tax agreements) that can be claimed against the AMT.
AMT in income tax: Requirement for reporting
All taxpayers to whom the AMT provisions apply must obtain a report from a chartered accountant certifying that the adjusted total income and the AMT have been computed in accordance with the Income Tax Act’s provisions in Form No. 29C, and provide the report on or before the deadline for filing the return of income. Report and income tax returns can both be submitted electronically.
FAQs
Are there any exceptions with respect to AMT?
Yes. A person, Hindu Undivided Family (HUF), Association of Persons (AOP), Body of Individuals (BOI), and artificial juridical person for whom the adjusted total income does not exceed Rs 20,00,000 are exempt from the implementation of the AMT provisions.
What TDS is subtracted from the AMT?
Amounts paid to the seller of taxable goods or services must be withheld for TDS at a rate of 2% when the overall value of such supply, under a single contract, exceeds Rs 2,50,000.