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Wednesday, October 4, 2023

Union Budget 2023: What is retrospective taxation? Here is everything you need to know

The word retrospective means ‘to look back in the past’. In taxation, retroactive tax means giving effect to an amendment to the law in effect before the date the changes were introduced. Taxes a transaction that took place before the law was enacted.

Retrospective taxation allows a nation to implement a rule to impose a tax on certain products, goods or services and treats and charges companies from a time before the date the law is passed. Countries use this form of taxation to rectify any deviations in tax policies that, in the past, allowed companies to take advantage of any loopholes. The 2022-2023 Union Budget introduced some modifications to the Income Tax Law (IT) of 1961 that would enter into force retroactively.

Changes and impact

The main amendments in the Income Tax Act 1961, making a retrospective amendment to the IT Act 2005-06, the Budget has clarified that taxes and surcharges will not be allowed to be claimed as deductions in the form of expenses, a practice that some companies and businesses resorted to the lack of legal clarity.

The IT department has cited some court rulings over the years that have benefited taxpayers by claiming the cessation as an expense and not a tax, saying the retrospective amendment is being made to correct it. The new amendment became effective retroactively as of April 1, 2005, and will therefore apply in relation to the 2005-06 assessment year and subsequent assessment years.

The assessment year (AY) was set to 2005-06 because the education tax was first introduced through the Finance Act 2004.

In order to annul the court rulings that differentiated in income tax between income tax and education tax and consider them contrary to the intent of the law, a clarifying reform was introduced in the income tax law. income, providing that any surcharge or education fee in the income tax will not be admitted as a business expense.

The rule clarifies that any expense incurred in the provision of benefits in violation of the provisions of the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 will be impermissible under the law. The step is intended to discourage pharmaceutical companies from giving gifts to medical professionals and claiming these expenses as deductions.

It has also allowed the exemption of the amount received by a family member of a deceased person, from the employer of the deceased person (without limit), or from any other person or persons with such money not exceeding Rs 10 lakh, where the cause of death of such person is a COVID-19 related illness, and payment is received within 12 months of the date of such person’s death.

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