Alternative Minimum Tax (AMT)

The Alternative Minimum Tax (AMT) in India is a tax mechanism designed to ensure that individuals and companies, particularly those benefiting from certain deductions, exemptions, and incentives, pay a minimum amount of tax to the government. This system targets taxpayers who manage to lower their tax liability significantly through various tax benefits under the Income Tax Act.

The rationale behind AMT is to reduce the disparities in tax payments by different taxpayers, ensuring that everyone pays at least a minimum level of tax. If the AMT calculated is higher than the regular tax liability, the taxpayer is required to pay the difference as AMT.

Additionally, the AMT includes a provision for the carry forward of the AMT credit, which allows taxpayers to use the excess amount paid as AMT against their regular tax liability in future years, up to a limit of fifteen years.

The provisions for Alternative Minimum Tax (AMT) apply to the following groups of taxpayers:

Individuals, Hindu Undivided Families (HUFs), Associations of Persons (AOPs), Bodies of Individuals (BOIs), or artificial juridical persons, provided their adjusted total income surpasses ₹ 20,00,000.

All other entities, regardless of their income level, except for individuals, HUFs, AOPs, BOIs, or artificial juridical persons.

However, taxpayers are required to pay Alternative Minimum Tax (AMT) only if they avail themselves of certain deductions under the Income Tax Act, specifically:

Deductions listed in Chapter VI-A under Heading C

Deductions, from Section 80H to 80RRB, cater to the profits and earnings from specific sectors like the hotel industry, small-scale industrial undertakings, housing projects, export businesses, and infrastructure development, among others. It's important to note, though, that deductions under Section 80P, which are for co-operative societies, do not fall under this requirement for AMT.

Deductions under Section 35AD

It allows a 100% deduction for capital expenditures on specified businesses, such as cold chain facilities or fertiliser production. Unlike typical depreciation allowances, this deduction is granted in full in the year the expense is incurred. It is not charged under AMT.

Profit-linked deductions under Section 10AA

This section offers deductions ranging from 100% to 50% for profits earned by units operating within Special Economic Zones (SEZs). This won’t be considered for Alternative Minimum Tax applicability.

Things to Note:

The rules for Alternative Minimum Tax (AMT) only affect non-corporate taxpayers who earn income through 'Profits or Gains of Business or Profession.'

Additionally, the requirement to pay AMT only arises when the standard tax due is less than the AMT for any financial year.

AMT rules do not apply to taxpayers who have chosen the concessional tax rates offered under section 115BAD or section 115BAC.

Basis of Levy:

It is levied on ‘Adjusted Total Income’ in a financial year when the tax on normal income is lower than the AMT on adjusted total income.

Adjusted Total Income

Adjusted Total Income is calculated by taking the gross income and adding back all the deductions listed under heading C of Chapter VI-A of the Income Tax Act.

This includes deductions from Section 80HH to Section 80RRB but excludes those under Section 80P and Section 10AA.

Adjusted Total Income = Taxable income + Deductions from Section 80HH to 80RRB (Excluding Section 80P and Section 10AA)

Scenario:

Assume a domestic company with a turnover of less than ₹ 250 Crores,

Calculation of Tax Liability

Under Section 115JD of the Income Tax Act, if the standard tax due is lower than the tax calculated under the Alternative Minimum Tax (AMT) system, the AMT must be paid. The difference between the regular tax amount and the tax paid under AMT is recognised as an AMT credit. This credit can be applied against the normal tax liability in subsequent years when the regular tax owed surpasses the AMT.

The tax credit can be utilised and carried over up to the 15th tax year following the year in which the credit was granted. In any given financial year, this tax credit is permitted to be used up to the amount by which the regular income tax exceeds the tax calculated under the Alternative Minimum Tax (AMT) provisions.

While AMT aims to minimise disparities in tax obligations, its complexity necessitates careful consideration by taxpayers, especially when claiming deductions and exemptions. It's crucial to remain informed about the specific provisions, rates, and calculation methods for AMT to optimise tax liabilities effectively.

Furthermore, the opportunity to carry forward and set off AMT credit against future tax liabilities provides a relief mechanism for those affected. Taxpayers should also be mindful of the evolving nature of tax laws and consider professional advice to navigate the intricacies of AMT, ensuring compliance and maximising potential benefits within the legal framework.

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