Brief Introduction Alternate Minimum Tax or AMT as the name suggests, is an alternate tax that an assessee has to pay, subject to certain conditions, instead of the income tax liability which is computed as per normal provisions of the Income-tax law. Alternate Minimum Tax is levied to impose higherRead more
Brief Introduction
Alternate Minimum Tax or AMT as the name suggests, is an alternate tax that an assessee has to pay, subject to certain conditions, instead of the income tax liability which is computed as per normal provisions of the Income-tax law.
Alternate Minimum Tax is levied to impose higher tax liability on non-corporate assessees who have claimed various profit-link deductions or investment-linked deductions in the relevant previous year.
My answer is based on the Indian Income law i.e. Income Tax Act, 1961.
The concept behind Alternate Minimum Tax
Let’s start our discussion with MAT i.e. Minimum Alternative Tax. It applies to corporate entities or companies.
Before MAT, it was seen that companies used to declare huge dividends to their shareholders. But when it came to filing income tax returns, they used to claim various profit linked and investment-linked deductions to report very low profits and even losses to arrive at negligible tax or nil tax whereas their financial statements would report huge profits.
It is true that the government provides such profit linked or investment linked deductions to encourage business and investments, but it also needs a sufficient and regular flow of revenue in the form of tax to fund its expenditure.
Hence, to prevent misuse of deductions to evade taxes by corporates, government introduce Minimum Alternate Tax to charge such assessees a minimum rate of tax.
Alternate Minimum Tax is the same as Minimum Alternate Tax in terms of concept. The provisions related to AMT are given under section 115JC of the Income Tax Act, 1961.
Scope of AMT as per section 115JC
Alternate Minimum Tax applies to all non-corporate assessees who claimed have claimed
Deduction claimed if any under Chapter VI-A from section 80H to 80RRB except section 80P
Exemption under section 10AA
Deduction under section 35AD (Investment-linked deduction)
However, there is a threshold limit for certain non-corporates.
By non-corporate assessees we mean:
Individual
Hindu Undivided Family (HUF)
Firms (partnership firms)
Co-operative societies
Association of Persons (AOP)
Body of Individuals (BOI)
Artificial Juridical Person (AJP)
Limited Liability Partnership (LLP)
AMT is applicable to all except
Individuals
HUF
AOP
BOP
Artificial Juridical Person
If their total adjusted income does not exceed Rs 20,00,000 in the previous year.
Therefore, AMT is applicable to all other non-corporate assessees like LLP, firms and cooperative societies irrespective of their total adjusted income.
Calculation of Alternate Minimum Tax
The rate of AMT is 18.5% of the adjusted total income. This adjusted total income and the AMT on it is calculated in the following manner:
The higher of the following becomes the tax liability of the assessee:
Alternate Minimum Tax calculated on adjustment income plus surcharges u/s 87A (4% Health and education cess)
Income Tax calculated on taxable income (as per normal provisions)
Numerical example
Mr X is a businessman who has earned the following income and expenditure in P.Y 2020-2021: (Amount in Rupees)
Income from manufacturing business 25,00,000
Interest on saving bank account 8,000
Dividend from ABC ltd 10,000
Insurance premium paid 1,00,000
Capital expenditure made as per section 35AD 5,00,000
Mr X is eligible to claim a profit linked deduction of Rs 6,00,000.
Also, the depreciation allowed (other than under 35AD) as per Income-tax Act,1961 amounts to Rs. 3,00,000.
Following is his computation of both AMT and Income tax liability as per normal provisions.
Statutory Liquidity ratio is the minimum percentage of reserves of liquid assets that the commercial bank should maintain. These liquid assets are in the form of gold, cash, and other securities. These reserves are kept with the bank itself and not with the Reserve Bank of India. The bank holds variRead more
Statutory Liquidity ratio is the minimum percentage of reservesof liquid assets that the commercial bank should maintain. These liquid assets are in the form of gold, cash, and other securities. These reserves are kept with the bank itself and not with the Reserve Bank of India.
The bank holds various demand and time deposits of the public, the total of which is called Net Demand and Time Liabilities (NDTL). This includes demand deposits that have to be paid on demand. Various other deposits like time deposits, fixed deposits, demand drafts, etc. are also included.
Every bank must keep a portion of its NDTL in the form of cash, gold, or other liquid assets. Therefore, the Statutory Liquidity Ratio is the ratio of these liquid assets to the total demand and time liabilities. The authority to determine the ratio lies with the RBI, who can increase it to the extent of 40%.
FORMULA
PURPOSE OF SLR
RBI controls the flow of cash in the economy by means of monetary policy measures through financial instruments like Statutory Liquidity Ratio. At the time of inflation, RBI increases SLR to reduce the flow of cash whereas, at the time of deflation, they reduce SLR to increase the flow of cash. Maintaining SLR also helps ensure the solvency of the commercial banks.
If the banks do not maintain the necessary level of SLR, they would be liable to pay a penalty to RBI at 3% per annum above the bank rate, on the shortfall amount of that day.
The commercial banks are required to keep a certain amount of their deposits with the central bank and the percentage of deposits that the banks are required to keep as reserves is called Cash Reserve Ratio. The banks have to keep the amount to maintain the Cash Reserve Ratio with the RBI. CRR meansRead more
The commercial banks are required to keep a certain amount of their deposits with the central bank and the percentage of deposits that the banks are required to keep as reserves is called Cash Reserve Ratio.
The banks have to keep the amount to maintain the Cash Reserve Ratio with the RBI.
CRR means that commercial banks cannot lend money in the market or make investments or earn any interest on the amount below what is required to be kept in CRR.
RBI mandates Cash Reserve Ratio so that a percentage of the bank’s deposit is kept safe with the RBI, hence, in an uncertain event bank can still fulfill its obligation against its customers.
CRR also helps RBI to control liquidity in the economy. When CRR is kept at a higher rate, the lower the liquidity in the economy, and similarly when CRR is kept at a lower rate, there is higher liquidity in the economy.
The Reserve Bank of India also regulates inflation through the Cash Reserve Ratio:
During inflation, that is when RBI wants to apply contractionary monetary policy, it increases CRR so that the money left with banks to lend is reduced. Such measures reduce the money supply in the economy and therefore help combat inflation.
During deflation, that is when RBI wants to apply expansionary monetary policy, it reduces CRR, so that the money left with banks to lend is increased. Such measures increase the money supply in the economy and therefore help combat deflation.
The formula for CRR is-
Reserves maintained with Central Banks / Bank Deposits * 100%
For example:
The current CRR is 3% which means that for every Rs 100 deposit in the commercial banks have to keep Rs 3 as a deposit with RBI.
To determine if a person is a resident in India as per the Income Tax Act 1961, he has to fulfil any of the 2 following conditions; Condition A Stay in India for 182 days or more in the previous year, or Stay in India for 60 days or more in the previous year and another 365 days or more in the 4 yeaRead more
To determine if a person is a resident in India as per the Income Tax Act 1961, he has to fulfil any of the 2 following conditions;
Condition A
Stay in India for 182 days or more in the previous year, or
Stay in India for 60 days or more in the previous year and another 365 days or more in the 4 years immediately preceding the previous year.
The second condition above is not applicable if he is an Indian citizen leaving India for the purpose of employment, or he is a member of the crew of an Indian ship, or he is only coming to India on a visit.
If he fails to fulfil either of the two conditions, then he is termed as a non-resident.
In India, a resident person can be classified into two:
Resident and ordinarily resident
Resident but not ordinarily resident
Condition B
A resident is a resident and ordinarily resident if (B):
He has been a resident in India for at least 2 out of the previous 10 years immediately preceding the relevant previous year, and
He has been in India for a period of 730 days or more during 7 years immediately preceding the relevant previous year.
If a person satisfies any one condition of (A) but does not follow all conditions of (B), then he is termed as a resident but not ordinarily resident.
EXAMPLE
If Nithin is living in India for 190 days in the previous year and was a resident for the previous two years only staying for 400 days in the previous 7 years, then he fulfils condition (A) but not both conditions of (B) and hence he is a resident but not ordinarily resident.
Income derived from farming land, building constructed or associated with farming land, and commercial products from farming land is called agricultural income. According to Section 10(1) of the Income Tax Act, agricultural income is exempt from tax. However, the government can levy tax if agricultuRead more
Income derived from farming land, building constructed or associated with farming land, and commercial products from farming land is called agricultural income.
According to Section 10(1) of the Income Tax Act,agricultural income is exempt from tax. However, the government can levy tax if agricultural income is above Rs 5,000.
Following are the sources to be considered for agricultural income according to the conditions mentioned in Section 2 (1A) of the Income Tax Act:
Revenue generated through rent or lease of land in India that is used for agricultural purposes.
Revenue generated through the commercial sale of produce gained from agricultural land.
Revenue generated through the renting or leasing of buildings in and around the agricultural land subject to the following conditions:
The cultivator or farmer should have occupied the building, either through rent or revenue.
The building is used as a residential place, storeroom, or outhouse.
The agricultural land or the land where the building is located, is being assessed for land revenue or subject to a local rate assessed.
If the land does not fall under the provisions stated above, the Income Tax Act requires a separate evaluation to calculate tax.
The Income-tax Act has laid down a method to indirectly tax such income.
This method or concept is called the partial integration of agricultural income with non-agricultural income. It aims at taxing the non-agricultural income at higher rates of tax.
Partial integration of agricultural income with non-agricultural income involves the following steps:
For example, the base income of the individual is Rs. 20,000 and agricultural income is Rs 10,000, then we first have to calculate tax on Rs 30,000. For convenience, we can call this tax T(30,000)
Assuming that the income falls under tax slab A, this tax slab A has to be added to the agricultural income and tax has to be calculated on it as well and it is called T(S+10,000).
The final tax on the individual’s income will be T(30,000)- T(A+10,000)
The important step to keep in mind is to aggregate the agricultural income while calculating tax otherwise it can lead to double taxation, extra tax, or interest on tax.
Under Activity-Based Costing, overheads are accurately assigned to different activities and their costs are determined through costing methods. Activities are those events that incur costs whereas overheads are expenditures that cannot be traced to any particular cost unit. A Cost driver refers to tRead more
Under Activity-Based Costing, overheads are accurately assigned to different activities and their costs are determined through costing methods. Activities are those events that incur costs whereas overheads are expenditures that cannot be traced to any particular cost unit.
A Cost driver refers to the factor that causes a change in the cost of an activity. Activity-Based Costing is done to establish a link between the activities and the product. The cost drivers are those links between the activities and the product.
Cost drivers are divided into four categories:
Resource Cost Driver – It is a measure of the number of resources used by an activity. It assigns the cost of a resource to an activity.
Activity Cost Driver – It is a measure of the frequency and intensity of demand, placed on activities by cost objects. It assigns activity costs to cost objects.
Structural Cost Driver – It results from the economic and technological structure of the industry.
Executional Cost Driver – It reflects the firm’s ability to plan and operate its production operations effectively.
A Cost Centre refers to a department in a business where costs can be allocated. These departments run various processes and incur costs. They can be related to the production of goods or the provision of services. Different centres are allocated different budgets and hence it enables the business to run efficiently by tracking its incomes and expenses easily.
Proper management of cost centres can help the company cut additional costs from each department. It also helps in more accurate forecasts depending on future changes.
Cost centres and Cost Drivers are both important factors while following Activity-Based Costing. Some examples of cost drivers and cost centres are as follows :
Activity-based costing (ABC) is a system used to find production costs. It breaks down overhead costs between production-related activities and other activities. The ABC system assigns costs to each activity that goes into production, such as workers testing a product. ABC is based on the principleRead more
Activity-based costing (ABC)is a system used to find production costs. It breaks down overhead costs between production-related activities and other activities.
The ABC system assigns costs to each activity that goes into production, such as workers testing a product. ABCis based on the principle that ‘products consume activities.’
Traditional cost systems allocate costs based on direct labor, material costs, revenue, or other simplistic methods. As a result, traditional systems tend to over-cost high volume products, services, and customers; and under-cost low volume.
Hence, Activity Based Costing was developed for determining the cost. The basic feature of ABC is its focus on activities. It uses activities as the basis for determining the costs of products or services.
Activity-Based Costing is mostly used in manufacturing industries, however, its application is not only limited to that. Various industries like, construction, health care, medical organizations also use this method of assigning costs. Industries where customized products are made also tend to use such methods as it is easier to charge appropriate overhead costs from the customer.
Objectives of Activity-Based Costing:
Companies adopt ABC to assign cost elements to the products, activities, or services so that it helps the management to decide:
which cost can be eliminated or cut back
which products are unprofitable
if a product is over-priced or under-priced
if any activity is ineffective
various processing of the same product to yield better results
Advantages of Activity Based Costing are:
it takes into consideration both direct and overhead costs of creating a product.
it recognizes the fact that different products require different indirect expenses.
it sets prices more accurately.
it helps to see what overhead cost the company might be able to cut back on.
it helps to segregate fixed costs, variable cost, and overhead cost which helps to identify “cost drivers”.
it focuses on cost allocation in operational management.
Before implementing ABC, a company should consider the following:
manually driven Activity Based Accounting cost derivers is an inefficient use of resources.
it is an expensive method and it is difficult to implement
for small gains, there are alternative costing methods available for a company to use.
Formula= Total Cost Pool / Cost Driver
For example:
For a company, the salary for workers is Rs 1,00,000 for a financial year, the number of labor hours worked is 50,00 hrs. The cost driver rate is calculated by dividing the workers’ salary by the labor hours worked, that is,
Salary of the workers / Number of labor hours
Rs 1,00,000 / 50,000 hrs = Rs 2 per labor hour.
In the above example, the salary of the workers is the total cost pool or the overhead cost for which we want to find the cost driver rate and labor hours is the cost driver, that is, on the basis of what we want to find the rate.
What is Alternate Minimum Tax?
Brief Introduction Alternate Minimum Tax or AMT as the name suggests, is an alternate tax that an assessee has to pay, subject to certain conditions, instead of the income tax liability which is computed as per normal provisions of the Income-tax law. Alternate Minimum Tax is levied to impose higherRead more
Brief Introduction
Alternate Minimum Tax or AMT as the name suggests, is an alternate tax that an assessee has to pay, subject to certain conditions, instead of the income tax liability which is computed as per normal provisions of the Income-tax law.
Alternate Minimum Tax is levied to impose higher tax liability on non-corporate assessees who have claimed various profit-link deductions or investment-linked deductions in the relevant previous year.
My answer is based on the Indian Income law i.e. Income Tax Act, 1961.
The concept behind Alternate Minimum Tax
Let’s start our discussion with MAT i.e. Minimum Alternative Tax. It applies to corporate entities or companies.
Before MAT, it was seen that companies used to declare huge dividends to their shareholders. But when it came to filing income tax returns, they used to claim various profit linked and investment-linked deductions to report very low profits and even losses to arrive at negligible tax or nil tax whereas their financial statements would report huge profits.
It is true that the government provides such profit linked or investment linked deductions to encourage business and investments, but it also needs a sufficient and regular flow of revenue in the form of tax to fund its expenditure.
Hence, to prevent misuse of deductions to evade taxes by corporates, government introduce Minimum Alternate Tax to charge such assessees a minimum rate of tax.
Alternate Minimum Tax is the same as Minimum Alternate Tax in terms of concept. The provisions related to AMT are given under section 115JC of the Income Tax Act, 1961.
Scope of AMT as per section 115JC
Alternate Minimum Tax applies to all non-corporate assessees who claimed have claimed
However, there is a threshold limit for certain non-corporates.
By non-corporate assessees we mean:
AMT is applicable to all except
If their total adjusted income does not exceed Rs 20,00,000 in the previous year.
Therefore, AMT is applicable to all other non-corporate assessees like LLP, firms and cooperative societies irrespective of their total adjusted income.
Calculation of Alternate Minimum Tax
The rate of AMT is 18.5% of the adjusted total income. This adjusted total income and the AMT on it is calculated in the following manner:
The higher of the following becomes the tax liability of the assessee:
Numerical example
Mr X is a businessman who has earned the following income and expenditure in P.Y 2020-2021: (Amount in Rupees)
Income from manufacturing business 25,00,000
Interest on saving bank account 8,000
Dividend from ABC ltd 10,000
Insurance premium paid 1,00,000
Capital expenditure made as per section 35AD 5,00,000
Mr X is eligible to claim a profit linked deduction of Rs 6,00,000.
Also, the depreciation allowed (other than under 35AD) as per Income-tax Act,1961 amounts to Rs. 3,00,000.
Following is his computation of both AMT and Income tax liability as per normal provisions.
See lessWhat is Statutory Liquidity Ratio?
Statutory Liquidity ratio is the minimum percentage of reserves of liquid assets that the commercial bank should maintain. These liquid assets are in the form of gold, cash, and other securities. These reserves are kept with the bank itself and not with the Reserve Bank of India. The bank holds variRead more
Statutory Liquidity ratio is the minimum percentage of reserves of liquid assets that the commercial bank should maintain. These liquid assets are in the form of gold, cash, and other securities. These reserves are kept with the bank itself and not with the Reserve Bank of India.
The bank holds various demand and time deposits of the public, the total of which is called Net Demand and Time Liabilities (NDTL). This includes demand deposits that have to be paid on demand. Various other deposits like time deposits, fixed deposits, demand drafts, etc. are also included.
Every bank must keep a portion of its NDTL in the form of cash, gold, or other liquid assets. Therefore, the Statutory Liquidity Ratio is the ratio of these liquid assets to the total demand and time liabilities. The authority to determine the ratio lies with the RBI, who can increase it to the extent of 40%.
FORMULA
PURPOSE OF SLR
RBI controls the flow of cash in the economy by means of monetary policy measures through financial instruments like Statutory Liquidity Ratio. At the time of inflation, RBI increases SLR to reduce the flow of cash whereas, at the time of deflation, they reduce SLR to increase the flow of cash. Maintaining SLR also helps ensure the solvency of the commercial banks.
If the banks do not maintain the necessary level of SLR, they would be liable to pay a penalty to RBI at 3% per annum above the bank rate, on the shortfall amount of that day.
See lessWhat is Cash Reserve Ratio?
The commercial banks are required to keep a certain amount of their deposits with the central bank and the percentage of deposits that the banks are required to keep as reserves is called Cash Reserve Ratio. The banks have to keep the amount to maintain the Cash Reserve Ratio with the RBI. CRR meansRead more
The commercial banks are required to keep a certain amount of their deposits with the central bank and the percentage of deposits that the banks are required to keep as reserves is called Cash Reserve Ratio.
The banks have to keep the amount to maintain the Cash Reserve Ratio with the RBI.
CRR means that commercial banks cannot lend money in the market or make investments or earn any interest on the amount below what is required to be kept in CRR.
RBI mandates Cash Reserve Ratio so that a percentage of the bank’s deposit is kept safe with the RBI, hence, in an uncertain event bank can still fulfill its obligation against its customers.
CRR also helps RBI to control liquidity in the economy. When CRR is kept at a higher rate, the lower the liquidity in the economy, and similarly when CRR is kept at a lower rate, there is higher liquidity in the economy.
The Reserve Bank of India also regulates inflation through the Cash Reserve Ratio:
The formula for CRR is-
Reserves maintained with Central Banks / Bank Deposits * 100%
For example:
The current CRR is 3% which means that for every Rs 100 deposit in the commercial banks have to keep Rs 3 as a deposit with RBI.
See lessHow to determine residential status of an individual as per Income Tax Act, 1961?
To determine if a person is a resident in India as per the Income Tax Act 1961, he has to fulfil any of the 2 following conditions; Condition A Stay in India for 182 days or more in the previous year, or Stay in India for 60 days or more in the previous year and another 365 days or more in the 4 yeaRead more
To determine if a person is a resident in India as per the Income Tax Act 1961, he has to fulfil any of the 2 following conditions;
Condition A
The second condition above is not applicable if he is an Indian citizen leaving India for the purpose of employment, or he is a member of the crew of an Indian ship, or he is only coming to India on a visit.
If he fails to fulfil either of the two conditions, then he is termed as a non-resident.
In India, a resident person can be classified into two:
Condition B
A resident is a resident and ordinarily resident if (B):
If a person satisfies any one condition of (A) but does not follow all conditions of (B), then he is termed as a resident but not ordinarily resident.
EXAMPLE
If Nithin is living in India for 190 days in the previous year and was a resident for the previous two years only staying for 400 days in the previous 7 years, then he fulfils condition (A) but not both conditions of (B) and hence he is a resident but not ordinarily resident.
See lessIs agricultural income taxable in India?
Income derived from farming land, building constructed or associated with farming land, and commercial products from farming land is called agricultural income. According to Section 10(1) of the Income Tax Act, agricultural income is exempt from tax. However, the government can levy tax if agricultuRead more
Income derived from farming land, building constructed or associated with farming land, and commercial products from farming land is called agricultural income.
According to Section 10(1) of the Income Tax Act, agricultural income is exempt from tax. However, the government can levy tax if agricultural income is above Rs 5,000.
Following are the sources to be considered for agricultural income according to the conditions mentioned in Section 2 (1A) of the Income Tax Act:
If the land does not fall under the provisions stated above, the Income Tax Act requires a separate evaluation to calculate tax.
The Income-tax Act has laid down a method to indirectly tax such income.
This method or concept is called the partial integration of agricultural income with non-agricultural income. It aims at taxing the non-agricultural income at higher rates of tax.
Partial integration of agricultural income with non-agricultural income involves the following steps:
The important step to keep in mind is to aggregate the agricultural income while calculating tax otherwise it can lead to double taxation, extra tax, or interest on tax.
See lessCan anyone tell me the meaning of terms “cost driver” & “cost center”?
Under Activity-Based Costing, overheads are accurately assigned to different activities and their costs are determined through costing methods. Activities are those events that incur costs whereas overheads are expenditures that cannot be traced to any particular cost unit. A Cost driver refers to tRead more
Under Activity-Based Costing, overheads are accurately assigned to different activities and their costs are determined through costing methods. Activities are those events that incur costs whereas overheads are expenditures that cannot be traced to any particular cost unit.
A Cost driver refers to the factor that causes a change in the cost of an activity. Activity-Based Costing is done to establish a link between the activities and the product. The cost drivers are those links between the activities and the product.
Cost drivers are divided into four categories:
A Cost Centre refers to a department in a business where costs can be allocated. These departments run various processes and incur costs. They can be related to the production of goods or the provision of services. Different centres are allocated different budgets and hence it enables the business to run efficiently by tracking its incomes and expenses easily.
Proper management of cost centres can help the company cut additional costs from each department. It also helps in more accurate forecasts depending on future changes.
Cost centres and Cost Drivers are both important factors while following Activity-Based Costing. Some examples of cost drivers and cost centres are as follows :
See lessWhat is Activity Based Costing?
Activity-based costing (ABC) is a system used to find production costs. It breaks down overhead costs between production-related activities and other activities. The ABC system assigns costs to each activity that goes into production, such as workers testing a product. ABC is based on the principleRead more
Activity-based costing (ABC) is a system used to find production costs.
It breaks down overhead costs between production-related activities and other activities.
The ABC system assigns costs to each activity that goes into production, such as workers testing a product. ABC is based on the principle that ‘products consume activities.’
Traditional cost systems allocate costs based on direct labor, material costs, revenue, or other simplistic methods. As a result, traditional systems tend to over-cost high volume products, services, and customers; and under-cost low volume.
Hence, Activity Based Costing was developed for determining the cost. The basic feature of ABC is its focus on activities. It uses activities as the basis for determining the costs of products or services.
Activity-Based Costing is mostly used in manufacturing industries, however, its application is not only limited to that. Various industries like, construction, health care, medical organizations also use this method of assigning costs. Industries where customized products are made also tend to use such methods as it is easier to charge appropriate overhead costs from the customer.
Objectives of Activity-Based Costing:
Companies adopt ABC to assign cost elements to the products, activities, or services so that it helps the management to decide:
Advantages of Activity Based Costing are:
Before implementing ABC, a company should consider the following:
Formula= Total Cost Pool / Cost Driver
For example:
For a company, the salary for workers is Rs 1,00,000 for a financial year, the number of labor hours worked is 50,00 hrs. The cost driver rate is calculated by dividing the workers’ salary by the labor hours worked, that is,
Salary of the workers / Number of labor hours
Rs 1,00,000 / 50,000 hrs = Rs 2 per labor hour.
In the above example, the salary of the workers is the total cost pool or the overhead cost for which we want to find the cost driver rate and labor hours is the cost driver, that is, on the basis of what we want to find the rate.
See less