AMENDMENT TO INCOME TAX ACT

• The Union Budget 2022-23 brought in some amendments to the Income Tax (IT) Act 1961 that would be effective retrospectively.
• A retrospective tax is one that is charged for transactions in the long past. It can be a new or additional charge on transactions done in the past.
• Ideally, retrospective tax is to make adjustments when policies in the past and the present are so vastly different that tax paid before under the old policy could be said to have been less. Retrospective tax could correct that situation by charging tax under the existing policy.
• Retrospective taxation allows a nation to implement a rule to impose a tax on certain products, goods or services and deals and charge companies from a time before the date on which the law is passed.
• Countries use this form of taxation to rectify any deviations in the taxation policies that, in the past, allowed firms to take benefit from any loophole. It affects companies that had unknowingly or knowingly used the tax rules differently.
• Not only India, but many other countries like the US, UK, Australia, Netherlands, Belgium, Canada, and Italy have retrospectively taxed firms.

Major Amendments in the Income Tax Act

• Making a retrospective amendment to the IT Act from 2005-06, the Budget has clarified that cess and surcharge will not be allowed to be claimed as deductions in the form of expenditure, a practice that some companies and businesses were resorting to in the absence of legal clarity.
• Citing some court rulings over the years that had given benefit to taxpayers in claiming cess as expenditure and not tax, the tax department said the retrospective amendment is being done to correct the anomaly.
• This amendment will take effect retrospectively from 1st April, 2005 and will accordingly apply in relation to the assessment year 2005-06 and subsequent assessment years.
• The change is being brought from AY 2005-06 as education cess was brought in for the first time by the Finance Act, 2004.

Significance:

• The court rulings differentiated between income tax and education cess on income tax, and in absence of a specific disallowance for ‘education cess’, courts had taken a view beneficial for taxpayers in many cases.
• In order to nullify the effect of such court rulings and to consider such rulings against the intention of the law, a clarificatory amendment has been introduced in the income tax law, providing that any surcharge or education cess on income tax shall not be allowed as business expenditure.

Cess

• Cess is a form of tax levied over and above the base tax liability of a taxpayer.
• Cess is resorted to only when there is a need to meet the particular expenditure for public welfare.
• Cess is not a permanent source of revenue for the government, and it is discontinued when the purpose of levying it is fulfilled.
• It can be levied on both indirect and direct taxes. 

Surcharge

• A surcharge is an extra fee, charge, or tax that is added on to the cost of a good or service, beyond the initially quoted price.
• It is added to an existing tax and is not included in the stated price of the good or service.
• It is levied for extra services or to defray the cost of increased commodity pricing.