Alternative Minimum Tax (AMT)
Reviewed by Aug 27, 2020| Updated on
Government has introduced various incentives and profit-linked deductions to encourage investments in different industries. Taxpayers who are eligible to claim such deductions/incentives would become zero tax companies or may end up paying marginal tax even though they can pay normal taxes. The government also needs regular/consistent tax inflows as they are one of its biggest revenues to fund various expenses for the country's welfare.
What is AMT?
The government provides incentives/deductions to a few companies making them zero tax/marginal tax companies. To ensure the levy of tax on such zero tax/marginal tax companies, the concept of minimum tax was introduced. The Alternative Minimum Tax (AMT) was initially introduced in the name of 'Minimum Alternate Tax (MAT)' for companies to collect the minimum tax. This tax is to be paid by companies that claim profit-related deductions in those financial years (FYs) in which normal tax payable is lower than MAT. AMT works when adopted on similar principles for non-corporate taxpayers. Nevertheless, factors such as applicability, measurement of adjusted income, exemption, and reporting obligation are different from MAT.
The current AMT rate is 18.5% (plus applicable surcharge and cess). AMT is a tax levied on 'adjusted total revenue ' in an FY where normal income tax is lower than AMT on adjusted total income. So, regardless of normal tax, taxpayers to whom the AMT provisions apply must pay AMT.
How to Calculate?
In order to calculate AMT, a taxpayer has to first arrive at the adjusted total income. Adjusted total income can be calculated by adding taxable income with deductions claimed under Chapter VI-A (from Section 80H to 80RRB except for 80P), Section 10AA, and Section 35AD (reduced by regular depreciation allowed).
Now, the taxpayer has to multiply the adjusted total income with the applicable AMT rate. Tax liability of the taxpayer will be the tax liability computed as per normal provisions of the Income Tax Act or AMT calculated at 18.5% (plus applicable surcharge and cess) on adjusted total income, whichever is higher.
Exemption & AMT Credit
AMT provisions shall not apply to an individual, Hindu Undivided Family (HUF), Association of Persons (AOP), Body of Individuals (BOI), and the artificial judicial person whose adjusted total income does not exceed Rs 20,00,000.
While minimum tax is being levied in an FY, the normal tax is lower than AMT. In subsequent FYs, there is a chance where AMT is lower than normal tax. Then, 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.
The remaining 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 up to 15 FYs succeeding the FY in which such AMT is paid.