The Union Budget 2022-23 has made some retrospective amendments to the Income Tax Act of 1961. In essence, retrospective tax pays attention to transactions from far in the past, with the ability to levy new or additional charges. This form of taxation allows countries to rectify any aberrations in previous taxation policies that previously allowed firms to exploit loopholes. This article will break down the key changes associated with these amendments.
Understanding Retrospective Tax
Retrospective tax is a tool utilized by nations to correct taxation policies of the past. This form of taxation allows for new or additional charges on transactions that have already occurred. Several countries that employ this kind of tax include the US, UK, Belgium, Netherlands, Canada, and Italy, among others.
Dissecting the Retrospective Amendments to the Income Tax Act
The Union Budget 2022-23 saw numerous changes made to the Income Tax Act, including a crucial one about cess and surcharge. The modification clarifies that cess and surcharge cannot be claimed as expenditure deductions – a practice that businesses have been employing due to a lack of legal clarity. This change is applied retrospectively from April 1, 2005, and will affect the assessment year 2005-06 and onwards.
The Importance of Cess and Surcharge
Cess is an additional tax over the main tax liability of a taxpayer and is usually utilized for public welfare-related expenditures. Contrarily, a surcharge is an additional fee or tax added to the cost of a good or service beyond its initial quoted price. Both cess and surcharge are applicable on both indirect and direct taxes.
Other Retrospective Amendments
The government has also announced exemptions for amounts received for Covid-19-related medical treatments and death. Gifts and freebies to doctors are no longer treated as business expenditure under the Income Tax Act, discouraging pharmaceutical companies from claiming these expenses as deductions.
Changes for Questioning Sources of Funding for Companies
The government has made alterations to the Income Tax law to question the source of funds in the hands of creditors. The provision states that the funding source will be deemed clarified only when the creditor also explains the funding source. This amendment could impact businesses, especially startups, if the creditor is not registered with SEBI. It now falls on the recipient to prove the legitimacy of the income source and the net worth of the provider.
