AMT: Does It Impose Additional Taxes Under Income Tax Bill, 2025?
Background
The Alternate Minimum Tax (“AMT”) has its genesis in the Minimum Alternate Tax (“MAT”), which was introduced to ensure that taxes were paid by even those companies that intended to avoid payment of taxes by engaging in ingenuous tax planning methods despite having earned significant amount of book profits. These companies, called “zero-tax companies”, while reporting significant book profits, paid minimal or no income tax by leveraging various exemptions and deductions available under the Income Tax Act, 1961 (“IT Act”).
All companies are mandated to pay MAT if their tax calculated under normal provisions is less than 18.5 per cent of their book profits. The introduction of MAT ensured that such zero-tax companies also had to pay a fixed percentage of their book profits as tax, thereby discouraging ingenuous tax planning and preventing tax avoidance.
Initially, the liability concerning MAT was limited to corporate entities, leaving non-corporate entities, such as limited liability partnerships (“LLPs”), outside its purview. To rectify this, the Finance Act of 2011 introduced Sections 115JC to 115JF, adapting the construct of MAT for non-corporate entities in a modified form known as AMT. The primary objective of AMT is to address the advantages previously enjoyed by non-corporate entities, with some transitioning from a corporate structure to an LLP structure with an explicit motive to benefit from lower tax liabilities, while still avoiding MAT.
AMT was first made applicable exclusively to LLPs, but was subsequently extended to encompass all non-corporate entities, including individuals, Hindu Undivided Families (“HUF”), association of persons, etc. Consequently, under this framework, a non-corporate entity is liable to pay AMT at a rate of 18.5 per cent if the tax payable according to other regular provisions of the IT Act is less than the tax computed on adjusted total income.
MAT and AMT – How does it operate?
Both MAT and AMT provide for a minimum tax that the stipulated entities are required to pay, but the primary difference lies in their computation method. This creates a distinction between the amount of tax payable by corporate and non-corporate entities.
MAT is calculated on “adjusted book profit” based on the “book profit” as determined in the profit-and-loss account prepared in accordance with Schedule VI of the Companies Act, 1956, with certain specific adjustments made in accordance with the provisions of Explanation to Section 115JB of the IT Act. However, AMT is computed by considering the “adjusted total income”, which is the total income derived under the provisions of the IT Act as increased by specific deductions, as per the provisions of Section 115JC of the IT Act. Thus, a non-corporate entity would be liable to AMT at 18.5 per cent of the adjusted total income, whereas a company would be subject to MAT at the same rate calculated on the basis of book profits.
Proposal under Income Tax Bill, 2025
The Income Tax Bill, 2025 (“IT Bill”) proposes to make certain changes to the existing taxation regime relating to AMT, as follows.
Consolidation of MAT and AMT
As has been highlighted earlier, the IT Act has separate provisions for MAT and AMT, suggesting that companies and non-corporates entities have to calculate their MAT and AMT liability separately.
Under the IT Bill, these provisions relating to AMT and MAT were proposed for consolidation into a single framework under Section 206. It is essential to note that the IT Bill has merely consolidated the provisions for the ease of reference for the taxpayers without affecting, in any manner, the distinctive classification between AMT and MAT stipulated under the IT Act.
Similar to the IT Act, the IT Bill stipulates for the computation of tax on the basis of book profits for a company and on the basis of adjusted total income “in any other case”, meaning thereby the non-corporate entities, including LLPs.
Expansion of scope of AMT provisions
Under the existing provisions of the IT Act, AMT is applicable to entities that satisfy the conditions stipulated therein. For non-corporate entities other than LLPs, AMT is applicable only if the adjusted total income exceeds INR 2 million. This qualification does not apply for LLPs, which are subject to payment of AMT, irrespective of their adjusted total income. Under Section 206 of the IT Bill, the threshold of INR 2 million has been retained for all non-corporate entities except LLPs, implying that these entities would continue to be exempt from the application of AMT.
Furthermore, as per Section 115JEE of the IT Act, AMT is applicable to only those non-corporate entities that claimed specific income-based deductions, including those under Chapter VI-A(C), those for specified businesses under Section 35AD, and those available to Special Economic Zone (SEZ) units under Section 10AA.
The IT Bill does not contain any corresponding provision like Section 115JEE, effectively removing the qualifying criteria for the application of AMT only to such selected non-corporate entities. Thus, it appears that the scope of AMT has been expanded to include those non-corporate entities earlier exempt from paying AMT, considering they did not avail the specified deductions. This, therefore, makes them liable to now pay AMT under the new IT Bill.
The proposed amendments in the IT Bill could involve significant implications for non-corporate entities, including LLPs, relying solely on long-term capital gains (“LTCG”) as their source of income. LTCG is profit earned from the sale of securities held for more than 12 months. Under the existing provisions of the IT Act, LTCG is taxed at a concessional rate of 12.5 per cent. Non-corporate entities that do not claim any stipulated deductions benefit from this concessional rate and are exempt from paying AMT at 18.5 per cent. However, the IT Bill appears to change this by making such non-corporate entities subject to AMT, which mandates paying the higher of either tax under normal provisions or AMT calculated at 18.5 per cent on adjusted total income.
This change spells a direct increase in tax liability for these non-corporate entities, which will now be taxed at the AMT rate of 18.5 per cent, instead of the lower LTCG rate of 12.5 per cent. This translates to a 6 per cent hike in taxes, creating a heavier financial burden for entities that earn income solely from LTCG. Beyond the monetary impact, the introduction of AMT implies additional compliance requirements, which will make tax filing more complex for these non-corporate entities.
However, this proposed change appears to be a legislative oversight, specifically considered in the backdrop of the government’s intention to reduce tax burden and ensure ease of compliances for the taxpayers. It also does not align with the intention behind the introduction of the IT Bill, which is premised on the concept of “nyaya” and seeks to simplify taxation and enhance tax certainty through reduced compliances and ease of doing business. This issue is expected to be addressed by the Standing Committee reviewing the IT Bill and appropriate changes could be made before it becomes an Act.
Conclusion
These proposed provisions of IT Bill create a lot of confusion as well as additional tax liabilities. For example, in case a non-corporate entity earns a significant amount of capital gains, it would be liable to pay tax on its entire income at the rate of 12.5 per cent under the IT Act, assuming that it does not have any other source of income. However, under the IT Bill, in case the non-corporate entity is expected to pay AMT, then the effective tax liability for the entity shall jump to 18.5 per cent from the existing 12.5 per cent .
This is definitely not the intention of the Government because the Government, through the introduction of IT Bill, merely wanted to streamline and simplify the tax regime whereas because of this anomaly, the situation may have become more complicated and we may foresee a phase of restructuring to avoid this additional tax.
Going forward, it may also influence structuring of new entities and LLPs may lose their usage. It is expected that this anomaly shall be rectified soon so that such entities are not loaded with additional tax obligations.
