Are you liable to pay tax if you have claimed education cess? All you need to know

Education cess was introduced in the Financial Year (FY) 2004-2005 with the motive of financing primary education. An education cess is referred to the additional levy applied on the basic tax liability by the government for generating additional revenue to fund primary, secondary and higher education. Currently, the health and education cess is 4 percent of gross tax liability (including surcharge). Taxpayers wanted to claim the cess as deduction from their taxable income, which led to a dispute with the Tax Department. Due to this, the matter was discussed before the Bombay High Court, which granted a deduction to the taxpayer.

Relying on the Bombay High Court’s decision, some other taxpayers began claiming cess deductions, either in their tax return or via an application made before the Tax Officer/Appellate Authority.

In order to put a stop to the controversy, Minister of Finance Nirmala Sitharaman brought an amendment via the Finance Act, 2022 with retrospective effect from FY 2004-2005 (that is the year in which the education cess was first introduced). According to the amendment, any surcharge or cess will not be allowed as a deduction to the taxpayer.

What more does the rule say?

It also provided that for the past years, the tax officer is empowered for issuing notices and passing rectification orders. There is a limitation of time to pass a rectification order, with the limitation period of four years starting from 1 April 2022.

A taxpayer can file an application in a prescribed form within the specified time for recomputation of their tax. In such instances, the taxpayer is going to be safeguarded from the levy of penalty. Recently, the Central Board of Direct Taxes (CBDT) notified Rules and the Application Form in which this request is to be made.

On 28 September 2022, the CBDT released a notification laying down the process to file applications for recomputation of income where the taxpayers have claimed cess deductions. It notifies the forms for the same- namely Form 69 and Form 70.

After the taxpayer files an application in Form 69, the tax officer has to recompute the total income by amending the relevant order and issuing a notice. As per the notice, the timeline for paying the tax shall also be mentioned. After the tax payment, the taxpayer is required to intimate the tax officer in Form 70 about the details of the taxes paid.

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