Education

Widening the minimum tax net

| Updated on: Apr 08, 2012
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The Finance Bill, 2012 has brought non-corporate business enterprises under the Alternate Minimum Tax, MAT TO AMT

After corporates and limited liability partnerships (LLPs), it's now the turn of other classes of tax payers — including sole proprietors, partnerships and, more importantly, association of persons (AOPs) — to contribute to the exchequer.

With the proposed amendments, non-corporate business enterprises would also be brought within the folds of the Alternate Minimum Tax (AMT).

While sole proprietors and partnerships together bag a significant 30 per cent market share of small and medium enterprises, bringing about 30 lakh such enterprises in India into this new tax net, AOPs could potentially impact even consortium arrangements among residents as well as multinational tax payers.

Income-tax laws provide for incentives in respect of certain businesses or undertakings, which result in the tax liability being nil or negligible, although the enterprises may have substantive book profits.

What is AMT?

AMT attempts to ensure that those who benefit from these incentives pay at least a certain amount of minimum tax. AMT is computed on income before such incentives.

Currently, only LLPs are covered under AMT while companies pay minimum tax based on book profits.

Now, with the proposed amendment, all taxpayers end up shelling out some minimum tax.

However, the excess of AMT paid over the normal tax (called AMT credit) is allowed to be carried forward for set-off against the tax payable under the normal provisions for a period of 10 years.

Who and how it impacts

The Government has doled out tax incentives for special economic zones (SEZ), specified infrastructure companies and specified businesses set up in specified areas to provide required impetus to certain industries and backward areas.

Such eligible undertakings, set up in non-corporate formats, facilitated tax-efficient profit repatriation in addition to tax incentives.

With the introduction of AMT, these classes of assessees could now be liable to AMT at 18.5 per cent (plus applicable surcharge and cess).

Consequently, consortiums developing, operating and maintaining specified infrastructure facilities like road, highway projects, water-supply projects, ports, airports, etc., or developing an SEZ; units operating in an SEZ; operating and maintaining other facilities such as hotels, hospitals and convention centres in specified areas; and manufacturing units in special category states or undertakings in north-eastern States, would be liable to AMT. Needless to say, this unexpected levy cripples their cash flow.

Exclusions

Although the intention has been to bring only business enterprises under the AMT net, the amendment extending these provisions to all persons seems to apply to all categories of taxpayers.

Fortunately, the Finance Bill, 2012 limits applicability of these provisions to individuals, Hindu Undivided Families, AOPs and bodies of individuals only if the adjusted total income exceeds Rs 20 lakh.

This monetary exemption will keep a large number of taxpayers out of the AMT bracket. However, taxpayers that cross the threshold could fall within the purview of this section and may have to go through the drudgery of procedural formalities, which seems unintended.

While the objective of this amendment is to widen the tax base and generate additional tax revenues, it could dampen the growth of industries in India. AMT for AOPs adds to the misery of infrastructure and industrial construction projects which are already impacted by the trend of tax authorities viewing consortium arrangements as AOPs.

Further, the mechanism of carry-forward and set-off of AMT credit could be tricky in post-tax-holiday periods where the formula of excess of regular tax over AMT could become unworkable.

This trend of providing tax incentives to boost the growth of specified industries followed by levy of AMT may be viewed critically by the industry as backdoor taxation.

(The author is Associate Director, Tax & Regulatory Services, PwC India. With inputs from Archana Korlimarla, Manager, PwC India. )

Published on November 15, 2017

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