What Is Alternative Minimum Tax (AMT) – Its Applicability, Calculation and Example
To promote investments in various schemes, the government of India offers numerous tax benefits that can significantly bring down an individual’s tax burden. However, a consistent inflow of tax is necessary to generate government revenue for funding development projects and improving public services.
Thus, the Finance Act of 1996 introduced Minimum Alternate Tax (MAT) also known as Alternative Minimum Tax (AMT). It allows the government to collect minimum tax from companies or corporate taxpayers who claim deductions. Based on a similar principle, the Finance Act of 2011 introduced Alternative Minimum Tax or AMT for non-corporate taxpayers.
What Is AMT, and Why Was It Implemented?
Alternative Minimum Tax is an alternative to the regular tax liability. It does work on the same principle as MAT, but it is unique in terms of applicability, exemptions, rules, deductions, and calculations.
The government introduced AMT in order to find a balance between offering tax deductions/exemptions and collecting minimal taxes. The aim is to promote and incentivise investments while making sure that entities do not overuse the tax benefits to the extent that they do not pay tax at all.
For non-corporate taxpayers, the rate of AMT is 18.5% of adjusted total income (plus surcharge and cess). However, for non-corporate assessees who have a unit located in an International Financial Services Centre and earn income through conversion of foreign exchange, AMT is 9%.
Applicability of AMT
Initially, the government came up with the concept of minimum taxation for corporates through the Finance Act of 2011. After that, the government extended the coverage of minimum tax to include non-corporates as well. Here is a list of taxpayers covered under Section 115JC of the IT Act:
- Non-corporate taxpayers
- Individuals, HUFs, Body of Individuals and Association of Persons (only when their total adjusted income exceeds Rs. 20,00,000 annually)
However, these taxpayers have to pay AMT only when they claim the following deductions:
- Deductions claimed under Chapter VI A of IT Act: These include Sections 80H to 80RRB but taxpayers claiming deductions under Section 80P related to co-operative societies are not eligible for paying AMT.
- Deductions claimed under Section 35D of the IT Act: This Section allows 100% deductions on depreciation of capital assets when such assets have been in use for some specific businesses like cold storage facilities, fertilizer manufacturing, etc.
Additionally, taxpayers claiming deductions under Section 10AA of the Income Tax Act need to pay AMT.
Also Read: Section 92E Of The Income Tax Act: Meaning, About & Applicability
AMT Exemptions
The following categories of taxpayers do not have to follow AMT provisions if their adjusted total income is less than Rs. 20 lakh.
- Individual taxpayers
- Hindu Undivided Families or HUFs
- Association of Persons or AOPs
- Body of Individuals or BOIs
- Artificial Juridical Persons
Thus, based on the threshold of adjusted income, AMT does not apply to Limited liability Partnerships and other non-corporate taxpayers.
How to Calculate Alternative Minimum Tax Liability?
To calculate the AMT liability, one needs to consider the standard income tax regime. After this, one has to include deductions claimed under the sections mentioned above to their standard tax liability. For deduction under Section 35AD, one should deduct the depreciation as per provisions under Section 32.
AMT at the rate of 18.05% (plus surcharge and cess) applies to the adjusted total income after adding these deductions.
Let’s take an example to understand the calculation of Alternative Minimum Tax liability. Rahul earns an annual income of Rs. 25 lakh. For the financial year 2021-2022, he does not claim deductions under Section 35AD or Sections 80H to 80RRB. However, he does claim Rs. 25,000 deductions under Section 10AA of the Income Tax Act.
| Annual Income | Rs. 25,00,000 |
| Deduction claimed under Section 10AA | Rs. 25,000 |
| Deduction claimed under Section 35AD | |
| Deduction claimed under Section 80H to 80RRB, excluding Section 80P | |
| Adjusted Total Income | Rs. 25,00,000 + Rs. 25,000 = Rs. 25,25,000 |
Thus, as determined in the table, Rahul incurs 18.05% AMT on his adjusted total income of Rs. 25,25,000. So, his AMT liability is 18.05% of Rs. 25,25,000 = Rs. 4,55,762.5
Requirements to Report AMT
According to Section 115JC of the Income Tax Act, a taxpayer who falls under the applicability of AMT has to furnish a report from a Chartered Accountant to verify their calculations. To do so, one needs to fill out Form 29C.
Then, a Chartered Accountant verifies whether tax computation (adjusted income and AMT) has taken place as per the IT Act guidelines. Once verification is done, taxpayers have to file Form 29C on or before the ITR filing due date. Taxpayers can do this along with their income tax returns via the e-filing portal.
Example:
An AMT report should contain three paragraphs.
First: Contains a declaration from a CA stating that he/she verified the computation and documents provided by the taxpayer.
Second: Contains a certificate of verification and shows the calculations.
Third: Declaration stating that the information provided in these documents is correct.
Also Read: Section 115BA Of The Income Tax Act: Meaning And Eligibility
Tax Liability Applicable for AMT
The tax liability will be higher of the two whenever AMT is applicable under Section 115JC of the Income Tax Act:
- Tax liability is computed as per normal slab rates after taking into consideration all deductions and relaxations available under different chapters of the IT Act.
- Tax liability computed as per AMT rate of 18.5% on adjusted total income.
What is AMT Credit?
The major aim of the Alternative Minimum tax was to ensure that companies availing benefits and deductions do not pay zero tax or marginal tax, as this affects the national treasury. In an FY, when applicable rates are lower than AMT, taxpayers are liable to pay minimum tax. However, in subsequent years when AMT is lower than normal taxes, one can use excess AMT paid earlier in the form of AMT credit. This credit helps to reduce tax liability according to normal rates, and it is given as the difference between the normal tax rate and AMT.
Taxpayers can use AMT credits for up to 15 succeeding financial years from the FY in which AMT was paid. However, this credit amount will lapse at the end of 15 years, and one does not receive any interest on them.
AMT credit is explained with the following example:
Suppose an entity, XYZ is liable for AMT provisions. Tax liability according to normal rates in FY 2020-21 is Rs 12,00,000 and as per AMT is Rs. 14,00,000. This entity is liable to pay AMT as tax liability as per normal rate is lower.
Now in FY 2022, tax liability as per normal rate is Rs. 16,00,00 and as per AMT is Rs. 15,00,000. In this year, it will pay tax as per the normal rate. As there was AMT paid in the preceding year, they have total AMT credit of Rs. 14,00,000 – Rs. 12,00,00 = Rs. 2,0,000 with them. They can use this credit for an amount not exceeding the difference between the normal rate and AMT in FY 2022 i.e. Rs. 1,00,00 (Rs. 16,00,000 – Rs. 15,00,000). The remaining credit can be forwarded to the coming years.
Final Word
For the development and upliftment of the country, tax collection is a vital process. Only through the revenue generated from tax imposition can the government offer improvement in public services. This highlights the importance of Alternative Minimum Tax.
If you are liable to incur AMT, understanding how to calculate your tax liability and paying the correct amount on time can save you from many monetary and legal penalties.
FAQs On Alternate Minimum Tax
Ans: Alternative Minimum Tax applies to adjusted income in a financial year when the standard tax rate is lower than AMT. However, if in a subsequent year, the rate of AMT becomes lower, the taxpayer can carry forward the AMT amount and reduce it against normal tax. If there is any balance after this calculation, one can carry it forward for up to 15 financial years. So, this concept is commonly referred to as AMT credit.
Ans: The government introduced a Minimum Alternate Tax for only corporate taxpayers. It allows them to collect taxes from zero tax companies. Meanwhile, Alternative Minimum Tax is an extension of MAT, and it applies to non-corporate taxpayers. These two serve the same purpose but follow different rules, calculations, deductions, etc.
Ans: When two or more individuals come together to form an entity and earn an income together, they form a Body of Individuals (BOI). The entity should only comprise individuals who have a common intention behind forming a BOI.
Ans: Section 80P of the IT Act sets provisions to offer tax deductions to co-operative societies engaged in specific activities. Co-operative societies that do not come under the control of the Reserve Bank of India can claim deductions under this section.
Ans: Surcharge and cess are the types of taxes that serve different purposes. The government collects cess to meet specific needs of the public, like education or health, and it applies to the total tax and surcharge amount. Surcharge applies to the tax liability of high-income taxpayers.
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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
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