New Income-Tax Bill restores alternate minimum tax relief for LLPs

Business Standard

2 days ago

In a relief for non-corporate taxpayers, the government on Monday corrected an earlier drafting error, reinstating relief from the alternate minimum tax (AMT) for partnership firms and limited liability partnerships (LLPs) under the revised Income Tax (No. 2) Bill, 2025, presented in Parliament by Union Finance Minister Nirmala Sitharaman.
The revised Bill, which incorporates almost all of the recommendations of the Select Committee chaired by Baijayant Panda, was passed by the Lok Sabha through a voice vote, without discussion. The House also approved the Taxation Laws (Amendment) Bill, 2025, which grants tax relief under the new Unified Pension Scheme, extends benefits to Saudi Arabia's Public Investment Fund, and clarifies block assessment rules following tax searches.
Both Bills now move to the Rajya Sabha for consideration and will become law upon receiving Presidential assent.
AMT, levied at 18.5 per cent plus cess and surcharge for non-corporate taxpayers, is intended to ensure high earners cannot fully offset their tax liabilities through exemptions. LLPs with only long-term capital gains (LTCG) income are otherwise taxed at 12.5 per cent.
The earlier version of the Bill had omitted a critical reference to Chapter VI-A deductions in the AMT provisions for LLPs. This would have exposed LLPs — including those earning solely LTCG taxed at 12.5 per cent — to the higher AMT rate of 18.5 per cent plus cess and surcharge. The revised draft restores this reference in Clause 206, ensuring AMT applies only when total income is reduced by such deductions, consistent with the original intent.
While the Select Committee made more than 285 recommendations, it did not propose altering the AMT framework for LLPs as contained in the first version of the Income Tax Bill, introduced in February. According to the Bill's statement of objects and reasons, alongside the committee's proposals, the government incorporated stakeholder suggestions to convey the proposed legal meaning more accurately, including 'corrections in the nature of drafting, alignment of phrases, consequential changes and cross-referencing'.
One significant Select Committee recommendation, however, has been dropped. This would have broadened transfer pricing scrutiny by allowing a company to be treated as an 'associated enterprise' if it exercised 'substantial influence' over another, even without meeting current shareholding or board control thresholds. The provision would have brought a larger set of inter-corporate transactions under transfer pricing rules, which are designed to ensure related-party dealings reflect market value and prevent profit shifting.
Dinesh Kanabar, chief executive officer of Dhruva Advisors, said the earlier draft risked introducing subjectivity. 'The earlier Bill proposed that two 'enterprises' would be regarded as associated if at any time during the year there was common management or control, irrespective of the Act's specific definitions. It is now provided that only in specified circumstances will management and control be deemed common, and the test applies as at the end of the year. This removes subjectivity and the litigation that goes with it,' he said.
The latest version of the Income Tax Bill also restores key tax benefits for charitable and religious trusts. It reinstates a provision that allows such entities to reinvest capital gains in new capital assets to claim exemption, as well as the option to apply unspent income in the immediately succeeding year without losing tax benefits.
A senior Central Board of Direct Taxes official said: 'If a charitable or religious trust sells a capital asset – such as land, buildings, shares -- and makes a capital gain, it can avoid paying tax on that gain if it reinvests the proceeds in another capital asset for its charitable purposes. This treatment already existed under the Income-tax Act, 1961, and the new Bill retains the same rule.'