Voluntary move to get income re-assessed without exemption of cess, surcharge not to attract penalty, says FM

Finance Minister Nirmala Sitharaman on Friday urged taxpayers to voluntarily go for reassessment of income, if they have claimed cess and surcharge on direct tax as exemption. This will help them avoid penalty under the new provisions of the tax law.

One of the 39 amendments in the Finance Bill, which were approved by the Lok Sabha on Friday, provides that deduction of surcharge or cess which has been claimed and allowed to the taxpayer will be deemed to be “under-reported” income and will attract 50 per cent penalty. Further, it provides an opportunity to taxpayers to seek non-levy of such penalty by making a claim to the Assessing Officer for re-computation of total income without allowing surcharge or cess as an expenditure. It may be noted that the Finance Bill 2022 had proposed a retrospective disallowance of deduction for surcharge or cess with effect from AY 2005-06.

Now, the Finance Bill will be taken up for discussion in the Rajya Sabha after which and it is expected to return early next week.

Concern about retrospective nature

During the reply on debate in the Lok Sabha, some members raised concern about the retrospective nature of the new provisions. In her response, the Finance Minister said that cess and surcharge on tax have been, over the years, misused where people have treated it as exemption or business expenses undertaken and therefore they think, it can be used as for deleting that level of income from their taxable income. So, that has become very confusing, leading taxpayers to approach the courts.

“That amendment, with the retrospective effect, has been brought more for clarity and that is not going to burden taxpayers because what we have done is (asking you) please approach from your side claiming that this is shown as undisclosed income and if you come on your own there is no penalty,” she said while clarifying that Income Tax Department will reassess the income including that part which has other been shown as business expenditure and according legitimate tax will need to be paid.

Industry’s plea

However, the industry seeks more clarity. Vineet Agrawal, Co-chairman of National Council on Direct Taxes, Assocham, says the amendment settles controversy that had arisen due to certain High Court orders in favour of assessees. However, “it would have been better if the amendment is brought prospectively to ensure certainty and court rulings be not overturned in such manner. Be it so, it is requested that, all claims which have been made following the decisions of courts should not be penalised on the basis of retrospective amendment. There is no provision in law to voluntary revise past returns and withdraw such claims,” Agrawal said who is also Senior EVP & Group Head (Taxation), JSW Group.

Rahul Garg, Chairman, National Council on Direct Taxes, Assocham, feels instead of letting the courts to finally decide, the prescribed mechanism nudges tax payers to pay up the tax on such debatable position without disputing the same to avoid penalty. In today’s complex business world, it is always good to get certainty in tax matters. Therefore “if such clarifications are issued upfront at initial stages itself many taxpayers would not even take such positions as they would be reasonably assured of uniform treatment,” he said.

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