The Central Board of Direct Taxes (CBDT) introduced Rule 132 from October 1, 2022. The new rule affects those who have an income from a business or profession and have availed deduction on cess/surcharge.
It is important to understand the significance of Rule 132 here.
According to Suneel Dasari, founder, and CEO, EZTax.in, an online income tax filing portal, the rule has been introduced because there was some confusion about whether a cess or a surcharge on income tax can be allowed as a deduction or not.
“Taxpayers are not allowed to claim deductions on income tax paid when calculating net profit. However, there was no clarity on whether the cess/surcharge paid could be claimed as deduction. Many businesses were taking advantage of this loophole and were claiming a deduction on cess/surcharge paid,” he says.
In Finance Act 2022, the government clarified that such cess or surcharge cannot be claimed as a deduction from profitable income while calculating income tax. The decision is applicable with retrospective effect from April 1, 2005. This means that if a business has claimed such deductions, they have paid less tax for all these years.
If a taxpayer has been claiming such deductions and under-reporting income tax, they would have to pay the taxes along with a penalty equal to 50 per cent of the taxes owed.
However, taxpayers have been provided with a one-time window till March 31, 2023 which allows taxpayers who can claim such deductions to again compute their income tax without claiming any deduction, and then pay the required taxes.
Further, all assesses whose claim for such deduction has been made and approved for any assessment year will be subject to mandatory rectification by the end of March 2026. They can also apply voluntarily to the assessing officer to recalculate their income.
Additionally, all assessees whose claim for the education cess and surcharge has been made and approved for any assessment year will be subject to a mandatory rectification process by the end of March 2026, or they can voluntarily apply to the assessing officer for a recalculation of their income.
Rule 132 also describes the procedure for re-computing such an income.
To start with, taxpayers who have claimed deduction on cess/surcharge need to share the details of taxable income, tax paid, and the amount of deduction they have claimed.
The information has to be submitted electronically on the income tax portal using form 69.
On receiving such information, the income tax officer will re-compute the taxable income of the taxpayer.
The taxpayer, after paying the tax, will have to inform the tax officer in form 70 within 30 days of making such payment. The taxpayer will then not be liable to pay any penalty.