Sunday, May 13, 2012

Alternate Minimum Tax - Impact of proposals of Finance Bill 2012

Traditionally income-tax levies Minimum Alternate Tax on company who discloses profits but after considering incentives and higher rate of depreciation has no or lower taxable income. Last year for the first time similar provisions were extended to non-corporate tax payer i.e. LLPs. In order to hoard erosion of tax base and widen tax base vis-à-vis profit linked deductions, Finance Bill 2012 proposed to levy AMT on all individual and non-corporate tax assesse, who has claimed deduction under any section from 80H to 80RRB (excluding 80P) and u/s 10AA. Series of amendments are proposed vide various clauses of the Bill.
Clause 48 of the Bill proposed to replace Section 115JC. Brief contents are as under:

·     A.       Sub-section (1) starts with notwithstanding words
o   It intends to compares normal tax on person other company with AMT.
o   If normal tax is lower than AMT, adjusted total income shall be deemed to be total income of person other corporate
o   Adjusted total income would be subject to tax at 18 ½ per cent.

    B. Sub-section (2) lays the method of calculating adjusted total income, which is sum of
o   total income (without considering provision of AMT)
o   income based deductions claimed any section under chapter VI-A Part C ie from section 80H to 80RRB and
o   deduction claimed u/s 10AA ie units established in Special Economic Zones

  C. Sub-section (3) requires such person other corporate to obtain report in prescribed form, from accountant,
o   Accountant is required to certify computation of adjusted total income and AMT is as per the provisions of the Act.
o   Report is required to be obtained on or before due date of filing of return u/s 139(1).

Clause 51 proposes to introduce new section 115JEE, giving exemption from applicability of AMT. It provides that provision of AMT shall not apply to individual or a Hindu undivided family or an association of persons or a body of individuals, whether incorporated or not, or an artificial juridical person, if the adjusted total income of such person does not exceed Rs 20 lakh.

Further various other clauses have been introduced for consequential amendment in various other section as under:
     a.       Clauses 47 – proposes to amend chapter XII-BA heading from “Special provisions relating to certain Limited Liability Partnerships” to “Special provisions relating to PERSONS OTHER THAN A COMPANY”
     b.      Clause 49 – proposes to amend S. 115JD to provide tax credit for alternate minimum tax to persons other than a company
     c.       Clause 50 – proposes to amend S. 115JE to provide that all other provisions of the Act shall apply to such person other than a company.
     d.      Clause 57 – proposes to amend various clauses of S. 140A relating to payment of self-assessment tax.
     e.      Clauses 82, 83 & 84 – proposes to amend sections 234A, 234B & 234C. It provides that AMT credit u/s 115JD shall be reduced from tax on total income determined as per the provisions of Act, for the purposes of determining interest u/s 234A – late filing of return of income, u/s 234B interest for default in payment of advance tax & u/s 234C deferment of advance tax.

AMT v/s MAT
AMT differs from MAT on various counts; some of them are as under:
S. No.
Particulars
MAT
AMT
1
Applies to
Companies
Persons other than Companies
2
Trigger point
Having book-profit
Claiming specified deductions
3
Computation mode
Book-profit is adjusted with specified adjustment
Total income is increased by specified deduction
4
Preparation of profit & loss  Accounts
Companies are required to prepare profit & loss account as per the provision of Schedule VI
No such legal requirement
5
Allowance of depreciation
Depreciation is to be calculated at the rate specified under Schedule XIII of Companies Act
Depreciation is to be calculated at the rate specified under rule 5 of Income-tax rules.
6
Treatment of brought forward losses & depreciation
Lower of brought forward losses or depreciation as per books is allowed to be deducted from book-profit
Both brought forward loss and well as brought forward depreciation (determined as per income-tax provisions), to be deducted before carrying specified adjustment to total income
7
Long term capital gains exempt u/s 10(38)
MAT is applicable
AMT is not applicable


Illustration
Provisions of the amended chapter can be better under stood with the help of following example:
X co has entered into Joint venture for carrying certain infrastructure projects eligible for profit based incentive u/s 80IA.
      A)     Computation of Income under normal provision of Act
Particulars
20x3
20x4
20x5
Gross Total income
19
1100
1400
Deduction u/s 80-IA       
15
500
400
Total income
4
600
1000
Tax @ 30%
1.2
180
300
E. Cess @ 3%
0.036
5
9
Total Tax
1.236
185
309

      B)      Computation of Adjusted total Income
Particulars
20x3
20x4
20x5
Total Income
4
600
1000
Add: Deduction under Chapter VIA-C (from 80H to 80RRB) &   10AA
15
500
400
Adjusted total Income
19
1100
1400
Alternate Minimum Tax @  18½ %
0*
204
259
Education Cess @ 3%

6
8
Total
0
210
267

      C)      Computation of tax
Particulars
20x3
20x4
20x5
Normal Tax (a)
1.236
180
300
Alternate Minimum Tax (b)
NA
204
259
Taxed at Normal Rate (NR) or AMT
NR*
AMT
NR
Higher of (a) or (b)
1.236
204
300
Tax Due (including Education Cess)
1.236
210
309
Less Tax credit utilised
NIL
NIL
24
Tax Payable
1.236
210
284
* Since adjusted total income is less than Rs 20 lakh AMT is not applicable
      D)     Computation of tax credit
Particulars
20x3
20x4
20x5
Tax credit brought forward & available for utilisation
NIL
NIL
24
Maximum amount upto which AMT credit can be availed
Normal tax (–) AMT excluding Education Cess


41


(300-259)
Tax Credit can be availed limited to actual credit
NIL
NIL
24
Tax credit allowed to be carried forward
NIL
24
NIL


(204-180)
(24-24)

Proposed introduction of AMT will fasten higher rate of tax on any assesee who earns income which is subject to special lower rate of tax ie less than 18½ %, even though such income is not entitled for specified deduction.  Further individual, HUF, and at times AOP & BOI are charged to slab rate of tax. AMT would take away benefit of slab rates. To illustrate,
Particulars
Scenario 1
Scenario 2
Gross Total Income
19,99,900
20,00,100
Deduction u/s 80IA
15,00,000
15,00,000
Total Income
04,99,900
05,00,100
Adjusted Total Income
19,99,900
20,00,100
Tax on Normal Rate
29,990
30,030
AMT
NIL
3,70,119
Tax liability without considering deduction u/s 80IA

4,30,030

In the above example it may be observed that under scenario 2 increase of income by Rs 200, assesse is subject to increase tax by Rs 3,40,089 and benefit of slab rate is lost. In such scenario it is suggested to introduce marginal relief and income subject to special lower rate of tax eg short term capital gains on listed securities etc., should also be excluded while computing Adjusted Total Income.  

Initially Government has provided various tax breaks to encourage certain industries in specified areas or certain type of industries, which is to be availed in specified number of years. Hence, questions may arise whether specified industries have been matured well before expected time or where India has achieved target industrialisation? Further is it fair to provide exemption on one hand and withdraw it on other hand? 

(Extracts from the article published in Income Tax Review April 2012 Issue)

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