AMENDMENTS to Income Tax Act to ban tax and surtax as retrospective deductions from 2005-2006 tax year will have ‘enormous’ impact on revenue, two senior officials say of the Ministry of Finance. Officials told The Indian Express that the retrospective nature is because the Inland Revenue wanted to insert the clarification from the date the tax was introduced into law, they said. The health and education tax is levied at 4 percent of the tax amount.
“The revenue implication will be huge. It’s not a matter of litigation. The intent should be clear. If you’re satisfied it’s not an expense, that’s why it’s been It was the belief that the tax could never have been allowed as an expenditure. For good legal reasons,” Chairman of the Central Board of Direct Taxation (CBDT), JB Mohapatra, told The Indian Express .
Making a retroactive amendment to the 2005-2006 Income Tax Act, the budget clarified that the tax and surtax cannot be claimed as deductions in the form of expenses. Citing court rulings, the tax office said the retrospective amendment is underway to correct the anomaly that the tax and surcharge are not considered part of the tax.
“…there is retroactivity in the bill, but you have to read the context in which the retroactive provision was introduced here. The department is firmly convinced, at the time of the introduction of the bill, that the tax can never be part of an authorized expenditure. This is why the condemnation in this case is unanimous — disposals could never have been allowed as expenses. It is at the stage of the bill, there will be a lot of discussions between the people who are competent in this area. We will have a considered opinion once the discussions are over. But this retroactivity in Section 40 is contextually very different from the retroactivity in Section 9. Let me clarify that,” Mohapatra said.
The change is made from AY 2005-06 as the education tax was introduced by the Finance Act 2004. years,” the budget documents stated.
Officials noted that while the amendment was drafted as retrospective, it is primarily intended to clarify legislative intent and will impact a handful of taxpayers and businesses that are in conflict with the taxman.
“It’s not retrospective, it’s just a clarification. This is in dispute. Already the assessment officers have told them (taxpayers) that they have to pay taxes on it. In a few cases, it went to court. It can never be the intention that tax payable can itself be an expense,” Revenue Secretary Tarun Bajaj said.
“It’s not retrospective taxation. It basically shows the intent of the legislature from the start,” Bajaj stressed, adding that the government says not to misinterpret the intent of the legislation. This will only affect a few assessments in dispute. “If this thing goes out, it’s a huge amount, 4% (percentage cess),” he noted.
Court rulings differentiated between income tax and education tax on income tax, and in the absence of a specific denial for “education tax”, the courts had taken a view that benefits taxpayers in many cases. In order to nullify the effect of these court rulings and to consider these rulings as contrary to the intent of the law, a clarifying amendment was introduced in the Income Tax Act, providing that any surcharge or school tax on income tax will not be allowed as a business expense.
The budget also made changes to the IT law, leaving room for questions from the taxman to explain the source of funds in the hands of the creditor. This could impact the financing of companies, especially startups, if the creditor is not a venture capital fund, a venture capital firm registered with SEBI.
Mohapatra said this amendment was made since bleaching and stratification was observed for funding sources.
“The exploitation section is section 68 on unexplained cash credits. If the amount on the books comes from tainted sources, then the department can ask, and can be satisfied, whether the funding on your books comes from good sources or from illegitimate sources. Then we can make the inquiry and impose it in the hands of the one who received it. In the case of private companies, the provision was that in case of share capital, share premium and share subscription funds, we can go behind this credit and we can ask for the source of the source in these cases . Now that we’ve expanded to include loans, borrowings, we can have that source verification source. This is necessary in the context where there are many situations on the ground where there is a huge layering when it comes to financing and illicit money laundering,” he said.
“The nature, source and legitimacy of a typical amount of money cannot be resolved by looking at the first source. We have to look at the second through third through fourth through fifth (source). They overlay the amount, the money will be generated at some point, the banking channels will be routed and the checks will come from another source Very difficult situation for the investigators and there are ingress providers, those who exchange checks for cash So just to prevent the entire tax economy from also being contaminated due to these types of stratification tactics, which is why verification of source of source is also, in our view, necessary for lending and borrowing , not just for capital and money sharing demands,” he said.