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      Reducing tax avoidance by curbing the excessive use of deductions and exemptions by corporate and select non-corporate entities : Clause 206(18) of the Income Tax Bill, 2025 Vs. Section 115JEE of the Income-tax Act, 1961

      7 May, 2025

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      Clause 206 Special provision for minimum alternate tax and alternate minimum tax.

      Income Tax Bill, 2025

      Introduction

      Clause 206 of the Income Tax Bill, 2025, represents a comprehensive attempt to consolidate, modernize, and rationalize the regime of Minimum Alternate Tax (MAT) and Alternate Minimum Tax (AMT) in India. These mechanisms were introduced to ensure that taxpayers, especially corporates and certain non-corporate entities, who avail themselves of various deductions and incentives, contribute a minimum amount of tax to the exchequer, thus curbing tax avoidance through excessive claims of deductions and exemptions. Within Clause 206, sub-clause (18) carves out specific exemptions from the applicability of the MAT/AMT provisions. This commentary will undertake a detailed analysis of Clause 206(18), its objectives, practical implications, and a clause-by-clause comparison with Section 115JEE of the Income-tax Act, 1961, which governs the application of AMT to non-corporate entities.

      Objective and Purpose

      The legislative intent behind MAT and AMT is to ensure a fair and equitable tax regime, preventing entities from escaping tax liability through aggressive tax planning. Clause 206(18) serves as a critical filter, delineating the classes of taxpayers and circumstances under which the MAT/AMT regime would not apply. The rationale is to avoid imposing minimum tax liability in situations where either policy reasons or practical considerations warrant exclusion, such as for certain life insurance companies, entities opting for alternative tax regimes, or those with low adjusted total income.

      Detailed Analysis of Clause 206(18) of the Income Tax Bill, 2025

      (a) Exclusion for Life Insurance Companies

      This sub-clause exempts companies whose income arises from life insurance business as referred to in section 194(1)(Table: Sl. No. 6). The rationale is rooted in the unique nature of life insurance business, where accounting for policyholder liabilities, actuarial valuations, and regulatory frameworks under the Insurance Act complicate the application of MAT. Historically, such companies have been subject to special tax provisions, recognizing the mismatch between book profits and taxable profits due to the peculiarities of insurance accounting. The exclusion ensures that the MAT regime does not override the specialized tax treatment accorded to life insurance companies.

      (b) Exclusion for Persons Opting for Alternative Tax Regimes

      Sub-clause (b) excludes persons who have exercised options u/ss 200(5), 201(2), 203(5), or 204(2). These sections, as per the structure of the new Bill, are likely to correspond to alternative tax regimes akin to the concessional tax rates introduced for corporates and individuals in recent years (for instance, the regimes u/ss 115BAA, 115BAB, 115BAC, and 115BAD of the Income-tax Act, 1961). The legislative intent is to encourage taxpayers to opt for simplified tax regimes with lower rates and fewer deductions, without the burden of MAT/AMT, thereby promoting ease of compliance and reducing litigation.

      (c) Exclusion for Persons Taxed u/s 202(1)

      This sub-clause excludes taxpayers whose total income is computed u/s 202(1). While the precise content of section 202(1) in the new Bill requires cross-reference, it is probable that it relates to certain special regimes or presumptive tax schemes (such as those for shipping, exploration, etc.), where the computation of income is on a presumptive basis. The exclusion avoids the incongruity of applying MAT/AMT when the regular tax itself is determined under a presumptive framework.

      (d) Exclusion for Individuals, HUFs, AOPs, BOIs, and Artificial Juridical Persons with Low Adjusted Total Income

      This is a significant carve-out, exempting individuals, Hindu Undivided Families (HUFs), associations of persons (AOPs), bodies of individuals (BOIs), and artificial juridical persons (AJPs) if their adjusted total income does not exceed twenty lakh rupees. The threshold-based exemption is designed to ensure that small taxpayers are not burdened with the complexities and compliance costs of MAT/AMT. It reflects a policy of progressive taxation, reserving the minimum tax regime for higher-income earners and sophisticated entities.

      (e) Exclusion for Specified Funds

      The final limb exempts specified funds referred to in Schedule VI (Note 1). These are likely to include certain categories of investment funds, such as those operating in International Financial Services Centres (IFSCs), alternative investment funds (AIFs), or other notified entities. The policy consideration is to maintain the competitiveness of India's financial sector, particularly IFSCs, by exempting such funds from MAT/AMT, which could otherwise erode returns and deter international capital.

      Practical Implications

      The exclusions under Clause 206(18) have wide-ranging practical implications:

      • Life Insurance Companies: The exclusion removes the compliance burden and potential distortions in tax liability for life insurers, aligning with global best practices.
      • Alternative Regime Opters: Taxpayers who choose the concessional rate regimes are incentivized, as they are not subject to MAT/AMT, making the new regimes more attractive and administratively simpler.
      • Presumptive Regime Taxpayers: The exclusion avoids the double imposition of minimum tax on entities already taxed on a presumptive basis, ensuring fairness.
      • Small Non-Corporate Taxpayers: Individuals, HUFs, AOPs, BOIs, and AJPs with modest income are spared from MAT/AMT, reducing compliance costs for small taxpayers and focusing enforcement on larger entities.
      • Specified Funds: Exempting specified funds, especially those in IFSCs, supports the government's policy to develop India as a global financial hub.

      From a compliance perspective, these carve-outs simplify tax administration and reduce the risk of litigation on MAT/AMT applicability. However, they also require careful monitoring to prevent abuse through artificial structuring to fall within the exclusions.

      Comparative Analysis with Section 115JEE of the Income-tax Act, 1961

      a. Structure and Scope

      Section 115JEE is the operative provision in the current Income-tax Act for the application of AMT to non-corporate taxpayers. It specifies:

      b. Points of Convergence

      • De Minimis Exemption: Both Clause 206(18)(d) and Section 115JEE(2) exempt individuals, HUFs, AOPs, BOIs, and certain artificial juridical persons if their adjusted total income does not exceed twenty lakh rupees. This reflects policy continuity and a shared recognition of the need to shield small taxpayers from AMT.
      • Specified Funds Exemption: Clause 206(18)(e) and Section 115JEE(2A) both exempt specified funds, though the cross-references differ due to changes in the legislative architecture. The underlying intent-to promote fund industry growth and align with international practice-remains the same.

      c. Points of Divergence and Expansion

      • Corporate Taxpayers and Life Insurance Companies: Section 115JEE is focused on non-corporate taxpayers, while Clause 206(18) applies to both corporate and non-corporate taxpayers, with explicit exemption for life insurance companies. This reflects a broader and more nuanced approach in the new Bill.
      • Special Regimes and Options: Clause 206(18)(b) and (c) introduce exemptions for persons opting for specific regimes (sections 200(5), 201(2), 203(5), 204(2), and 202(1)), which are not directly mirrored in Section 115JEE. This suggests a move towards greater flexibility and accommodation of new tax regimes in the 2025 Bill.
      • Comprehensive Structure: Clause 206(18) is part of a much more detailed and integrated MAT/AMT regime, covering both companies and non-corporate entities, and providing for a wider range of exclusions and computational refinements.

      Point-by-Point Comparison

      TopicClause 206(18) of the Income Tax Bill, 2025Section 115JEE of the Income-tax Act, 1961Analysis/Comments
      Exclusion for Life Insurance CompaniesExpressly excludes companies with income from life insurance business (s.194(1)(Table: Sl. No. 6))No specific exclusionMore explicit in new Bill; addresses a gap in the old regime, aligning with sector-specific tax treatment.
      Exclusion for Alternative Tax Regime OptersExcludes those who opt for alternative regimes (s.200(5), 201(2), etc.)No direct parallel; old Act only provides for AMT exclusion if deductions are not claimedNew Bill proactively excludes alternative regime opters, reflecting policy shift towards concessional, deduction-less regimes.
      Exclusion for Presumptive TaxationExcludes those whose tax is computed under s.202(1)No direct parallelAddresses practical issues in applying MAT/AMT to presumptive regimes, which was a source of ambiguity earlier.
      Threshold-based ExclusionExcludes individuals, HUFs, AOPs, BOIs, AJPs with adjusted total income <= Rs. 20 lakhsSame exclusion (sub-section (2))Threshold and classes of persons are consistent across both regimes. Ensures small taxpayers are not burdened.
      Exclusion for Specified FundsExcludes specified funds as per Schedule VI (Note 1)Excludes specified funds as per s.10(4D) (sub-section (2A))Both regimes exempt specified funds, though the referencing differs (Schedule vs. section). Reflects continuity in policy for funds, especially those in IFSCs.
      Scope/Classes of Excluded TaxpayersBroader, includes companies (life insurance), alternative regime opters, and othersFocused on non-corporate entities and specified fundsNew Bill expands the range of exclusions, reflecting changes in tax policy and the evolution of business structures.

      Interpretational and Policy Issues

      • Alignment with Policy Objectives: Both provisions seek to ensure MAT/AMT does not apply to small taxpayers or entities subject to special tax regimes. The new Bill's approach is more comprehensive and explicit, reducing scope for interpretational disputes.
      • Administrative Clarity: The new Bill's detailed exclusions provide greater certainty for taxpayers and administrators, especially in the context of new business models (e.g., IFSCs, specified funds).
      • Potential for Abuse: While broad exclusions are beneficial, they also necessitate robust anti-abuse rules to prevent taxpayers from artificially structuring affairs to fall within exemptions.
      • Continuity and Transition: The carry-forward and set-off mechanisms for MAT/AMT credit (addressed in other sub-clauses) are preserved, ensuring smooth transition for taxpayers moving from the old to the new regime.

      Practical Implications for Stakeholders

      • Businesses (Corporates and Non-corporates): The expanded exclusions, especially for companies engaged in life insurance, those opting for alternative regimes, and specified funds, simplify compliance and reduce effective tax rates for eligible entities.
      • Small Taxpayers: The Rs. 20 lakh adjusted total income threshold remains a critical relief, ensuring that individuals and small entities are not subject to MAT/AMT. This aligns with the government's stated policy of reducing compliance burden for small taxpayers.
      • Investment Funds and IFSC Entities: The explicit exemption for specified funds and IFSC units supports the development of India's financial sector and enhances international competitiveness.
      • Tax Administrators: Clearer exclusions reduce the administrative complexity and potential for disputes on MAT/AMT applicability, allowing focus on higher-value cases.

      Ambiguities and Issues in Interpretation

      • Definition of Specified Funds: The reference to "specified funds referred to in Schedule VI (Note 1)" in the new Bill must be read in conjunction with the relevant Schedule, which may be subject to future amendments or notifications. This introduces a dynamic element, requiring stakeholders to stay updated.
      • Interaction with Other Provisions: The cross-referencing to sections 200(5), 201(2), etc., presumes familiarity with the new Bill's structure. Taxpayers and professionals must exercise diligence to ensure correct interpretation and application.
      • Threshold Calculation: The computation of "adjusted total income" for threshold purposes must be strictly as per the formula and inclusions/exclusions specified, to avoid disputes.
      • Potential Overlap: In some cases, taxpayers may fall within more than one exclusion (e.g., a specified fund with income below Rs. 20 lakhs). The provision is drafted to ensure that any one ground is sufficient for exclusion.

      Comparative Analysis with Other Jurisdictions

      Globally, the concept of minimum taxation (including MAT/AMT) is not unique to India. The United States, for instance, has the Alternative Minimum Tax for individuals and corporations, though it has been substantially reformed in recent years. The trend internationally is towards simplification, with a focus on targeting only large-scale tax avoidance and ensuring that base erosion is checked without unduly burdening small or low-margin taxpayers. The Indian approach, as reflected in Clause 206(18), is largely in consonance with these trends, providing targeted carve-outs and aligning with sector-specific policy objectives.

      Conclusion

      Clause 206(18) of the Income Tax Bill, 2025, represents a significant evolution in the MAT/AMT framework, providing clear, targeted exclusions that reflect both policy considerations and practical realities. Compared to Section 115JEE of the Income-tax Act, 1961, the new provision is more comprehensive, accommodating changes in business structures, tax regimes, and the government's policy priorities. By exempting life insurance companies, alternative regime opters, presumptive regime taxpayers, small non-corporate entities, and specified funds, the new law seeks to strike a balance between revenue protection and taxpayer facilitation. Going forward, the effectiveness of these exclusions will depend on robust anti-abuse measures, administrative clarity, and ongoing policy review to ensure alignment with the evolving economic landscape.

      Alternative Titles for the Commentary

      1. "Evolving the Minimum Tax Regime: A Critical Analysis of Clause 206(18) and Its Alignment with Section 115JEE"
      2. "Exclusions from Minimum Alternate Tax: Legislative Intent and Practical Impact under the Income Tax Bill, 2025"
      3. "From Section 115JEE to Clause 206(18): A Comparative Study of MAT/AMT Applicability and Exemptions"
      4. "Redefining the Scope of Minimum Tax: Detailed Commentary on Clause 206(18) and Its Predecessors"

       

      Full Text:

      Clause 206 Special provision for minimum alternate tax and alternate minimum tax.

       

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