Alternative Minimum Tax (AMT): A Comprehensive Overview
To promote investment in a variety of programs and industries, the government has implemented a number of profit-linked deductions and incentives. Taxpayers who qualify for these deductions or incentives would either become zero taxpayers or pay marginal tax even though they are able to pay regular taxes. However, the government also requires a steady stream of tax revenue, which is one of its main sources of income, to pay for a range of national welfare-related costs. Hence, to ensure not allowing taxpayers to abuse the intention of introducing such incentives/deductions by taking them away indirectly and also to ensure the levy of tax on such zero tax/marginal tax companies, the concept of Minimum Tax was introduced. This was first implemented for businesses under the name "Minimum Alternate Tax (MAT)" in order to collect the minimum tax that businesses claiming profit-linked deductions must pay in those fiscal years (FYs) when the normal tax payable is less than MAT. In this article, we will share a detailed overview of alternative minimum tax.
Table of content
What is Alternative Minimum Tax?
AMT is a minimum tax that can be imposed in place of regular taxes. 18.5% of adjusted total income (plus applicable surcharge and cess) is the AMT rate. In a financial year where the tax on regular income is higher than the AMT on adjusted total income, the AMT is a tax imposed on "adjusted total income." Therefore, people to whom AMT requirements apply are required to pay AMT regardless of regular tax. You pay more for the following:
AMT at 18.5% on your adjusted total income (ATI) or regular tax on your total income
The AMT rate will be 9% if the individual is a unit situated in an International Financial Services Centre (IFSC) and receives all of their income in convertible foreign currency
The AMT rate for cooperative societies is lowered to 15%, as was previously stated in the budget update.
Applicability of Alternative Minimum Tax
As previously stated, the idea of MAT was first presented to corporations and then gradually extended to non-corporate taxpayers through AMT. Limited Liability Partnership (LLP) AMT was established by the Finance Act of 2011. Due to changes made by the Finance Act of 2012, AMT is now imposed on all non-corporate taxpayers as well as individuals. Consequently, the following taxpayers are subject to AMT provisions:
People who have an Adjusted Total Income (ATI) of more than Rs. 20,00,000. This includes individuals, Hindu Undivided Families (HUF), Associations of Persons (AOP), and bodies of individuals (BOI).
Any other person, regardless of income, except individuals, HUFs, AOPs, BOIs, and artificial legal entities.
Note that AMT does not apply to companies because MAT already applies to them.
However, under the Income Tax Act, these taxpayers should only pay AMT if they are claiming the following deductions:
Under the heading "C. — Deductions in respect of certain incomes," in Chapter VI-A, Sections 80H to 80RRB provide deductions for the profits and gains of particular industries, including small-scale industrial, hotel, housing, export, and infrastructure development. Nevertheless, the deduction granted to cooperative societies under Section 80P is not applicable for this purpose; or
Deduction under Section 35AD: Although capital expenditures on assets are typically eligible for annual depreciation, this section permits a 100% deduction on capital expenditures incurred for specific business purposes, such as the manufacturing of fertiliser or the operation of a cold chain facility; or
Under Section 10AA, units in Special Economic Zones (SEZs) are eligible for a profit-linked deduction, which can range from 100% to 50%.
The aforementioned information leads to the conclusion that the AMT provisions only apply to non-corporate taxpayers who earn under the heading of "Profits or Gains of Business or Profession." In addition, the AMT provisions only apply when the normal tax payable in any given fiscal year is less than the AMT. Additionally, the provisions of the AMT do not apply to taxpayers who have taken advantage of the concessional tax regime under section 115BAD or for new regimes under section 115BAC.
Exemption from AMT Applicability
The following taxpayers are exempt from AMT requirements if their yearly income is less than Rs. 20,00,000:
Individual taxpayers
HUF stands for Hindu Undivided Family
People's Association (AOP)
Individuals' Body (BOI)
A synthetic legal entity
LLPs, partnership businesses, and other non-corporate assessees are not eligible for this exemption, which is based on a monetary threshold of adjusted total revenue.
Calculation of Adjusted Total Income
The following formula is applied to calculate adjusted total income:
Taxable income according to normal provisions after all deductions (A) | XXXXX |
Add: Deduction claimed under Chapter VI-A from 80H to 80RRB except 80P (if any) (B) | XXXXX |
Deduction claimed under Section 10AA (if any) (C) | XXXXX |
Deduction claimed under Section 35AD reduced by regular depreciation allowed (if any) (D) | XXXXX |
Adjusted total income (E) = (A)+(B)+(C)+(D) | XXXXX |
AMT @ 18.5% of (E) | XXXXX |
Calculation of Tax Liability when AMT is Applicable
The following is the formula to calculate the tax liability in case of the applicability of alternative minimum tax:
Tax liability calculated under normal provisions of the Income-tax Act (normal tax liability) | XXXX |
AMT calculated @ 18.5% (plus surcharge and cess applicable) on adjusted total income | XXXX |
Tax liability | Higher of the above |
What is AMT Credit?
Even while the purpose of AMT was to collect taxes from non-taxpayers, it was also designed to provide a steady flow of revenue to the government. Thus, even though the minimum tax is imposed in a fiscal year where normal tax is lower than AMT, AMT paid in the past may be carried forward and deducted from normal tax to the amount of the difference between normal tax and AMT in later fiscal years where AMT is lower than normal tax. Any remaining balance following such a setoff may be carried over to later fiscal years. We refer to this idea as AMT Credit.
AMT credit, however, can only be carried forward for a maximum of 15 fiscal years after the FY in which the AMT is paid. The taxpayer will not be required to pay interest on the AMT credit. AMT credit will also adjust in accordance with any changes to regular tax brought about by orders issued by the income tax department. Furthermore, any FTC that exceeds AMT will be disregarded if the taxpayer has any foreign tax credits (taxes paid in foreign nations with which India has a bilateral or unilateral tax agreement) that can be claimed against AMT.
Conditions to Claim AMT Credit
To be eligible for AMT credit, the following requirements must be met:
The credit should be deducted for the full 15 assessment years.
On such a credit, interest cannot be paid.
If the amount of regular income tax or any AMT changes as a result of an order issued under the Income Tax Act, the tax credit under Section 115JD alters.
After claiming a deduction under Section 10AA, Section 35AD, or Chapter VI-A, the assessee may also deduct the bought forward AMT credit for the fiscal year in which the total adjusted income does not exceed Rs. 20 lakhs.
Steps to Claim AMT Credit
Step 1: First, figure out the ordinary tax liability and the AMT for the fiscal year.
Step 2: Any excess amount paid as AMT can be carried forward as AMT credit if it exceeds the ordinary tax due in any given fiscal year.
Step 3: In later years, the AMT credit may be carried forward and deducted from the regular tax obligation. AMT credit can be carried forward for up to 15 assessment years.
The AMT credit can be used to pay the full amount of the difference between regular tax and AMT in subsequent years where the regular tax liability is greater than the AMT liability. The amount of AMT credit used in a given year cannot be greater than the annual difference between ordinary tax and AMT.
Illustration:
Assume that in FY 2022–2023, an LLP with an adjusted total income of Rs 30 lakh pays an AMT of Rs 4 lakh. For the same year, Rs 2.5 lakh would be the ordinary tax burden.
The sum paid was Rs 4 lakh.
Liability for regular taxes: Rs 2.5 lakh
AMT credit for excess AMT paid: Rs 4 lakh minus Rs 2.5 lakh equals Rs 1.5 lakh.
If the LLP has an AMT liability of Rs 2.8 lakh and a regular tax liability of Rs 3 lakh for the upcoming fiscal year (FY 2023–24).
The difference is Rs 0.2 lakh (Rs 3 lakh minus Rs 2.8 lakh). To lower the normal tax burden, the LLP may use Rs 0.2 lakh of the AMT credit from the prior year.
Conclusion
AMT credit is available to individual taxpayers, HUFs, AOPs, BOIs, partnership firms, and LLPs whose adjusted total income exceeds Rs 20 lakh. For a maximum of 15 years, this credit can be carried forward and applied to future regular tax obligations. Effective management and use of AMT credit depend on accurate computation, record-keeping, and adherence to tax laws.
FAQ
Q1. What is the meaning of Minimum Alternative Tax (MAT)?
AMT is comparable to minimum alternative tax, or MAT. However, MAT is applied to businesses rather than on people or other entities.
Q2. How are MAT and AMT different?
AMT is imposed on people and entities other than businesses, whereas MAT is applied to businesses and firms. Additionally, book profits are used to calculate MAT, whereas adjusted total income is used to calculate AMT.
Q3. What is AMT Credit?
AMT credit is a tool that allows taxpayers to carry forward and deduct AMT paid in prior years against taxes paid in the future.
Q4. Who is eligible for Alternative Minimum Tax (AMT)?
Non-corporate taxpayers with income falling under the Profits of Business or Services category are subject to the AMT requirements.
Q5. Who is not applicable to alternative minimum tax?
Individuals, BOIs, HUFs, AOPs, and artificial juridical persons are exempt from the AMT rules if their adjusted total income is less than Rs 20 lakh.
Q6. What is the current AMT rate?
AMT is currently 18.5% plus any applicable cess and surcharge. The AMT is a tax levied on "adjusted total revenue" in fiscal years when the average income tax is lower than the AMT on adjusted total income.
Q7. What is the limit of the Alternative Minimum Tax (AMT)?
AMT has a cap of Rs 20,000,000. Individuals, HUFs, AOPs, BOIs, and artificial judicial persons whose adjusted total income is less than Rs 20,00,000 are exempt from the criteria.
Q8. Does depreciation affect AMT?
Yes, the Alternative Minimum Tax (AMT) may be impacted by depreciation. To determine the alternative minimum taxable income under the AMT regulations, specific modifications are made to the ordinary taxable income.
Q9. Is AMT applicable to companies?
MAT, not AMT, must be paid by companies.
Q10. Is AMT applicable under the new regime?
The provisions of the AMT will not apply to you if you have chosen the new regime.
Q11. Till how many years AMT credit can be carried forward?
For 15 years following the year of AMT payment, AMT credit can be carried forward.
Q12. What if I hold AMT credit and I want to shift to the new regime?
If you choose the new regime and have any previous AMT credit, it will expire and you won't be subject to AMT in the following years.
Q13. What is the AMT reporting requirement?
A report from a chartered accountant attesting that adjusted total income and AMT have been calculated in accordance with the provisions of the Income-tax Act must be obtained by all taxpayers to whom the AMT provisions apply. This report must be provided on Form No. 29C by the deadline for filing the Tax Audit Report. The report and income return can be submitted electronically.
Q14. Which form or schedule is used to calculate AMT on the return?
According to the rules outlined in Section 115JC of the Income Tax Act, a person who is required to pay AMT must present a report that attests to the computations. Form 29C must be completed and approved by a chartered accountant (CA) in order to accomplish this.
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