Budget Amendments to the Income Tax Act: How Closing the Cess/Surcharge Loophole Can Bring Legal Clarity

The Union Budget made changes to the Income Tax Act that would be retroactive. Making a retroactive change to the 2005-2006 law, the budget clarified that the tax and surtax will not be able to be claimed as deductions in the form of expenses – a practice that some businesses and businesses resorted to in the absence of legislation clarity. It also authorized the exemption of the amount received for medical care and for death due to Covid-19 retrospectively from April 1, 2020.

The budget also made changes to the IT law, allowing the tax authorities to demand explanations about the source of funds in the hands of the creditor.

Retrospective modification of tax and surcharge

Citing some court rulings over the years that had allowed taxpayers to claim the tax as an expense and not as a tax, the IRS said the retrospective amendment was in the works to correct the anomaly. “This amendment will take effect retroactively from April 1, 2005 and will therefore apply to the 2005-06 tax year and subsequent tax years,” the budget documents say.

Amendments on health, Covid-related expenses

The budget authorized the exemption of amount received for medical treatment and due to death due to Covid-19 retrospectively from April 1, 2020. It said: “Any sum of money received by an individual, from any person, in respect of any expenses actually incurred by him for his medical treatment or the treatment of any member of his family, in respect of any illness related to Covid-19 subject to the conditions notified by the central government to this regard, will not be the income of such a person.

The budget also authorized the exemption of the amount received by a member of the family of a deceased person, the employer of the deceased person (without limit), or any other person or persons with such money not exceeding Rs 10 lakh, where the cause of death of that person is Covid-19 related illness and payment is received within twelve months from the date of death of that person. These changes will come into effect retrospectively from April 1, 2020.

Separately, gifts and gratuities to physicians should not be treated as business expenses under Section 37 of the Income Tax Act.

Legislative change to question the sources of business financing

In another legislative amendment, a provision was introduced stating that the source of funding for a beneficiary’s loans and borrowings will be treated as explained only if the source of funds is also explained in the hands of the creditor. This could have an impact on the financing of companies, especially startups, if the creditor is not a venture capital fund, a venture capital company registered with the market regulator Sebi.
“Previously, if a company had false entries, the taxpayer would only provide details such as PAN and other financial details of the creditor and that was enough for the tax department. Now it is up to the beneficiary to prove that this is the right source of income and that they had the right net worth to provide this amount,” said Amit Maheshwari, Tax Partner, AKM Global.

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