Alternative Minimum Tax (AMT)

The government has implemented several profit-linked deductions and incentives to promote investment in various fields and industries. However, taxes are one of the government's primary sources of income, and taxes need to be collected regularly to cover a range of costs related to national welfare.

Alternative Minimum Tax (AMT) is a provision under the Income Tax Act designed to ensure that Individuals with significant income do not avoid paying taxes by taking advantage of various exemptions, deductions, and incentives. 

Read this article for insights on how AMT works.

What is Alternative Minimum Tax?

Initially, the Minimum Alternate Tax (MAT) in India was introduced to ensure that companies claiming profit-linked deductions pay a minimum tax even when their normal tax liability is low.

Later, the Alternate Minimum Tax (AMT) was introduced for non-corporate taxpayers, but with a different set of rules for computation, exemptions, and reporting. Although AMT works on similar principles as MAT, factors such as applicability, exemptions, and reporting obligations differ. The AMT rate is 18.5% of adjusted total income, plus surcharge and cess as applicable.

Basically, AMT ensures that individuals benefiting from tax deductions and exemptions pay at least the minimum amount of tax.

The tax is paid by the companies that claim profit-related deductions in the financial year, whereas the tax payable is normal compared to MAT. The AMT rate will be 9% if the individual is a unit housed in an International Financial Services Centre (IFSC) and gets all of its income in foreign currency that can be converted into the domestic currency.

The AMT rate for cooperative societies has been lowered to 15%.

Alternate Minimum Tax: Applicability

The idea of an Alternative Minimum Tax was first presented to businesses. However, LLPs and individual and non-corporate taxpayers were included in the AMT's purview by the Finance Act, 2011, and its revisions in 2012. 

AMT is relevant for the following reasons:

1. Individuals, Hindu Undivided Family (HUF), Association of Persons (AOP), Body of Individuals (BOI), or Artificial Judicial Person with a total adjusted income above Rs 20,000,000.
2. Everyone else, regardless of their financial level, excluding the individuals listed above.

AMT is only applicable to individuals in the following circumstances:

• If they wish to deduct expenses from the revenues of businesses like lodging facilities, real estate developments, small businesses, exporting, and infrastructure development under Sections 80H to 80RRB.
• Under Section 10AA, Special Economic Zone (SEZ) units are eligible for a deduction of 50% to 100%.
• Businesses that produce fertilizer or operate cold chain facilities are eligible for a 100% deduction on capital expenditures under Section 35AD.

Exemption & AMT Credit

• The laws governing AMT do not apply to individuals, HUFs, AOPs, BOI, or artificial judicial persons whose adjusted total income does not surpass Rs 20,00,000 in a year. 
• Even when a minimum tax is imposed throughout a fiscal year, the regular tax is still lower than the AMT. In future fiscal years, AMT may be lower than regular tax. The amount of advance-paid AMT can then be carried forward and subtracted from ordinary tax to the extent that it differs from ordinary tax.
• Following such a set-off, any surplus that is left over may be carried over to subsequent fiscal years. This concept is known as AMT credit. AMT credit may be carried forward for 15 fiscal years, starting from the fiscal year in which the AMT is paid.

How to Claim AMT Credit?

Here’s how to claim AMT Credit-

• Calculate AMT and Regular Tax

Firstly, calculate both the AMT and the regular tax liability for the financial year.

If the AMT paid in any financial year is higher than the regular tax payable, the excess amount paid as AMT can be carried forward as AMT credit.

• Carry Forward of AMT Credit

The AMT credit can be carried forward and set off against the regular tax liability in subsequent years. The carryforward period for AMT credit is up to 15 assessment years.

• Utilising AMT Credit

In future years, when the regular tax liability exceeds the AMT liability, the AMT credit can be utilised to the extent of the difference between the regular tax and AMT. 

Note: The AMT credit utilised in a year cannot exceed the difference between the regular tax and AMT for that year.

Example:

Suppose an LLP has an adjusted total income of Rs 30 lakh and pays an AMT of Rs 4 lakh in FY 2022-23. The regular tax liability for the same year would be Rs 2.5 lakh.

Amount paid: Rs 4 lakh

Regular tax liability: Rs 2.5 lakh

Excess AMT paid: Rs 4 lakh - Rs 2.5 lakh = Rs 1.5 lakh (AMT credit)

In the next financial year (FY 2023-24), if the LLP’s regular tax liability is Rs 3 lakh and the AMT liability is Rs 2.8 lakh.

Difference: Rs 3 lakh - Rs 2.8 lakh = Rs 0.2 lakh

The LLP can utilise Rs 0.2 lakh of the AMT credit from the previous year to reduce the regular tax liability.

Important Points to Remember

• Maintain accurate records of AMT paid and AMT credit carried forward and utilised each year.
• Ensure that the AMT and AMT credits are correctly reported in the tax returns.
• It’s advisable to consult with a tax professional or chartered accountant to accurately calculate and utilise the AMT credit and ensure compliance with tax regulations.

Individual taxpayers, HUFs, AOPs, BOIs, partnership firms, and LLPs with adjusted total income exceeding Rs 20 lakh can claim AMT credit. This credit can be carried forward for up to 15 years and used to offset regular tax liability in future years. Proper calculation, record-keeping, and compliance with tax regulations are essential for effectively managing and utilising AMT credit.