Alternative Minimum Tax (AMT): Applicability, Exemption, Credit, Calculation, Example

The Government has introduced various profit linked deductions and incentives in order to encourage investment in various schemes/sectors. Taxpayers who are eligible to claim such deductions/incentives would become zero taxpayers or may end up paying marginal tax though they are capable of paying normal tax. On the other hand, the Government also needs a regular/consistent inflow of tax which is one of its major revenues to fund various expenses for the welfare of the country. Hence, to ensure not allowing taxpayers to abuse the intention of introducing such incentives/deductions by taking it away indirectly and also to ensure levy of tax on such zero tax/marginal tax companies, concept of Minimum Tax was introduced.

This was initially introduced for companies in the name of ‘Minimum Alternate Tax (MAT)’ to collect minimum tax to be paid by companies who are claiming profit-linked deductions in such financial years (FYs) wherein normal tax payable is lower than MAT. Adjusted total income will be computed for MAT by adding and deducting certain specified items to the total income calculated under normal provisions. Then, tax at a rate lower than the normal rate of tax is levied on the adjusted income.

However, credit for MAT paid in earlier years was allowed to be carried forward and set off in subsequent year wherein normal tax payable was higher than MAT. 

Alternative Minimum Tax (AMT), introduced for non-corporate taxpayers works on similar principles. However, applicability, manner of computation of adjusted income, exemption, reporting requirement etc. are different compared to MAT. Read the article for details on how AMT works.

Budget 2022 update 
FM reduced the Alternate Minimum Tax (AMT) Rates to 15% from 18.5% for the co-operative societies.

Alternative Minimum Tax – Basics

As it is evident from the name, AMT is a minimum tax that is leviable alternatively to normal tax. Rate of AMT is 18.5% of adjusted total income (plus applicable surcharge and cess). 

AMT is a tax levied on ‘adjusted total income’ in an FY wherein tax on normal income is lower than AMT on Adjusted total income. So, irrespective of normal tax, AMT has to be paid by taxpayers to whom AMT provisions apply.

So, basically you pay higher of the following:

1. Normal Tax on your Total Income; or
2. AMT @18.5% on your Adjusted Total Income (ATI)

If the person is a unit located in an International Financial Services Centre (IFSC) and receives income solely in convertible foreign currency, the AMT rate will be 9%.

As mentioned above in the budget update, the AMT rate for cooperative societies is reduced to 15%.

Applicability of AMT

As already mentioned, initially the concept of MAT was introduced for companies and progressively made applicable to non-corporate taxpayers through AMT. Finance Act, 2011 introduced AMT on Limited Liability Partnership (LLP). The Finance Act, of 2012 introduced some amendments, and AMT is now applicable to individuals and all non-corporate taxpayers. Accordingly, AMT provisions are applicable to the following taxpayers:

• Individuals, Hindu Undivided Family (HUF), Association of Persons (AOP), Body of Individuals (BOI) or an artificial juridical person whose Adjusted Total Income (ATI) exceeds Rs.20,00,000.
• Every other person (other than an individual, HUF, AOP, BOI or artificial juridical person) irrespective of its income.

It is to be noted that as MAT is already applicable to companies, AMT is not applicable on them.

However, these taxpayers should pay AMT only when they claim the following deductions under the Income Tax Act:

• Chapter VI-A under the heading “C. — Deductions in respect of certain incomes’ – These deductions are under Section 80H to 80RRB provided in respect of profits and gains of specific industries such as hotel business, small scale industrial undertaking, housing projects, export business, infrastructure development etc. However, deduction under Section  80P which provides deduction to co-operative societies is excluded for this purpose; or
• Deduction under Section 35AD – While capital expenditure in assets usually qualify for depreciation year on year, under this Section 100% deduction is allowed on capital expenditure incurred for specified business such as operation of cold chain facility, fertilizer production etc; or
• Profit linked deduction under Section 10AA – Deduction of profit varying from 100% to 50% is provided to units in Special Economic Zones (SEZs).

Based on the above, it can be concluded that AMT provisions are applicable only to those non-corporate taxpayers having income under the head ‘Profits or Gains of Business or Profession’. Further, as mentioned above AMT provisions are applicable only when normal tax payable is lower than AMT in any FY. The provisions of the AMT are not applicable to a taxpayer who has exercised the concessional tax regime under section 115BAD or for new regime as per section 115BAC.

Exemption from Applicability of AMT

AMT provisions are not applicable to the following taxpayers when their annual income is less than Rs. 20,00,000:

• Individual taxpayers
• Hindu Undivided Family (HUF) 
• Association Of Persons (AOP) 
• Body Of Individuals (BOI) 
• An artificial juridical person 

This exemption based on monetary threshold of adjusted total income is not applicable to LLPs, partnership firms and other non-corporate assessees.

Calculation of Adjusted Total Income

Adjusted total income and AMT is arrived in the following manner:

Computation of Tax Liability When AMT Provisions are Applicable

AMT Credit

Though AMT was introduced to collect tax from zero tax payers, it was also with the intention of having consistent flow of tax to government. Therefore, while minimum tax is being levied in an FY wherein normal tax is lower than AMT, in subsequent FYs wherein AMT is lower than normal tax, AMT paid earlier is allowed to be carried forward and reduced against normal tax to the extent of the difference between normal tax and AMT. Balance if any after such set off can be carried forward to subsequent FYs. This concept is called AMT Credit.

However, AMT Credit is allowed to be carried forward for only upto 15 FYs succeeding the FY in which such AMT is paid. No interest will be payable on the AMT credit to the taxpayer.

In case of any change in normal tax due to any order passed by income tax department, AMT credit will also change accordingly. Further, if taxpayer has any foreign tax credit (tax paid in foreign countries with which India has bilateral or unilateral tax agreement) to be claimed against AMT, any FTC in excess of AMT shall be ignored.

Claiming of AMT Credit

The following conditions must be satisfied to claim AMT credit:

• The credit should set off up to the maximum period of the 15 assessment years.
• No interest is allowed to be payable on such credit.
• The tax credit under Section 115JD varies in case the amount of normal income tax or any AMT changes due to any order passed under the Income Tax Act.

The assessee can also set off bought forward AMT credit during the financial year in which the total adjusted income does not exceed Rs. 20 lakhs after claiming deduction under Section 10AA, Section 35AD or Chapter VI-A.

Reporting Requirement

All taxpayers to whom AMT provisions are applicable are required to obtain a report from Chartered Accountant certifying that adjusted total income and AMT have been computed as per provisions of Income-tax Act, in Form No. 29C and furnish the report on or before the due date of filing of Tax Audit Report. Report can be filed electronically along with return of income.

Screenshot of Form No. 29C is given below:

Illustration

Illustration (assuming status of the taxpayer to be individual) Amount (in Rs)