Cess Clarification: Tax Experts Wary of Reopening of Cases ‘Clarification will Prevent Litigations’

The proposed amendment to the Income Tax Act to insert a clarification disallowing cess as expenditure with retrospective effect could lead to reopening of past cases, say tax experts.

They said the amendment could also queer the pitch for many taxpayers involved in ongoing litigation, with positive revenue implication for the government. “Using the constitutional right to make retroactive amendments, especially for settled positions, hampers ease of doing business and increase litigation,” said Karishma Phatarphekar, partner at Deloitte India.

Government officials, justifying the budget announcement to insert the clarification, said cess is part of tax and cannot be allowed as a business expenditure to claim exemptions, as many companies have done since the education cess was introduced more than a decade and a half ago.

While taxpayers whose cases have already been decided by the Supreme Court are seen as insulated from retrospective amendments, there is a fear that the government may seek review of such orders. Considering the revenue gain for the government, there are apprehensions that it may be tempted to do so.

The clarificatory amendment will have an overriding effect on judicial pronouncements, said Amit Singhania, partner at law firm Shardul Amarchand Managldas.

“The cases which are pending adjudication at various forums may be decided against the taxpayers citing such retrospective amendment.”

But some experts don’t see the department reopening past cases.

“Where the intent of law is reflected in clarificatory amendments, new litigation on these issues will reduce. Cases under litigation on these issues will see a faster resolution, but re-opening of concluded matters is unlikely,” Nangia Andersen India chairman Rakesh Nangia said.

Because of the clarification, going forward, companies will not file cess as expenditure, and this will prevent may litigations from coming up, experts said.

Central Board of Direct Taxes chairman JB Mohapatra, in an interview to ET on Thursday, said courts had held that education cess was an allowable expenditure. But such decisions are against the intention of the law. The explanatory memorandum, provided with the Finance Bill, has devoted several paragraphs to this provision, explaining the rationale behind the move. It referred to a decision of the Supreme Court that pointed out that the provisions of the Finance Act, 2004 and Finance Act, 2011 specified that education cess was an additional surcharge levied on income tax. S-ET

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