Budget Reactions: Proprietorships, firms to pay 18.5% Alternate Minimum Tax

In order to widen the tax base, the government is proposing to impose 18.5% Alternate Minimum Tax (AMT), a variant of Minimum Alternate Tax (MAT), on sole proprietorships and partnership firms.

According to the proposal, mentioned in the Memorandum to the Finance Bill 2012, business entities such as sole proprietorships, partnership firms and association of persons will have to pay a minimum tax of 18.5%irrespective of the tax deductions they claim under various provisions of the Income Tax Act.

The new levy is extension of the concept of the MAT, which was introduced by the government to bring under the net the zero tax paying companies. The companies have to pay minimum tax (MAT) at 18.5% on their book profits.

The effective rate of MAT, after taking into account surcharge and education cess, works out to be more than 20%. MAT is also levied on Limited Liability Firms (LLPs), a new form of doing business which was introduced by the government last year.

According to the provision, a business entity will have to pay minimum AMT of 18.5% even after claiming deductions allowed under the Income Tax Act.

As regards the MAT, Finance Minister Pranab Mukherjee in his budget proposals retained the tax rate at 18.5% despite the demand of industry for its gradual reduction.

MAT rate has gone up from 7.5% in 2007 to 18% in 2010-11 and then further to 18.5% last year.