The Finance Bill, 2022 (the Bill) was presented by Hon’ble Finance Minister on Feb 1, 2022, proposing various changes in the provisions of Income Tax Act, 1961 (the Act). Subsequently, the government has proposed certain significant amendments at enactment stage, which individuals should take note, from income tax point of view.
Virtual Digital Assets
Effective April 1, 2022, irrespective of period of holding, the bill proposed tax at the rate of flat 30% (plus applicable surcharge and cess) on gains arising from the transfer of Virtual Digital Assets (VDAs), without any deduction for any expenditure other than cost of acquisition (COA). To address the ambiguity of COA, an amendment is proposed to state that deduction would be allowed only if there is COA. The same is in line with the recent clarification that all other expenses such as infrastructure costs incurred in mining of VDA will not be allowed as deduction.
The bill also proposed that set-off of and carry forward of losses incurred on transfer of VDAs to subsequent years against any other income is not permitted. Now, to tighten the norms for taxation of cryptocurrencies, an amendment is proposed to remove the reference “other”, explaining that loss cannot be set-off against income under any provision of the Act. In other words, losses incurred in one cryptocurrency cannot be set off against gains in another.
The government continues to take a very conservative stance on taxation of crypto assets. An amendment seeks to clear the ambiguity of the term “transfer”, by proposing that definition of transfer u/s 2(47) of the Act, applicable for capital assets, shall now apply to VDAs as well, whether held as capital asset or not. Resultantly, exchange and extinguishment of VDAs would also get covered as a transfer.
Updated return
Presently, taxpayers failing to furnish their original return in time have an option to file a belated return which can be revised in case of any error or omission made earlier.
The concept of updated return was introduced in the Bill, which allows individuals to file an updated return within 2 years of the end of an Assessment Year (AY), if they have have missed out on declaring some income. The option of updated return can be availed if time limits for belated/revised returns have elapsed, after paying additional tax. The amendment tabled, now also allows individuals who have filed a loss return to file an updated return provided positive income is declared in the updated return.
Further, the bill restricted persons subjected to search/survey/requisition to file an updated return for two years prior to the year of search. However, it is now proposed to restrict applicability of updated return to search cases in entirety. Resultantly, such persons cannot file an updated return for any prior AY.
Time limit for assessment
Over the years, government has constantly made efforts to reduce the time limit for completion of assessments done by the Income tax department.
Previously, time limit for completion of assessments for AY 2020-21 was within 1 year of the end of the AY, which would be March 31, 2022. However, the amendment proposed to extend the time limit for completion of assessment for AY 2020-21 to 30 September 2022 instead of 31 March 2022.
Further, from AY 2021-22, the time limit had been shortened further to 9 months.
Deduction of surcharge or cess
Effective AY 2005-06, the Bill proposed a retrospective disallowance of deduction for surcharge or cess as a business expense, clarifying that surcharge and cess are akin to tax and therefore not allowable. This led to doubts on the impact of past claims and a possible risk of penalty which could result in litigation.
The amendment provides that deduction of surcharge or cess claimed and allowed to the taxpayer will be deemed to be under-reported income and thus be subjected to 50% penalty. Further, it was clarified that pending claims in appeals would not be subject to penalty as they have not been allowed to the taxpayers yet.
However, the amendment also provides an opportunity to taxpayers to seek non-levy of any penalty by making an application to the assessing officer requesting for re-computation of total income without allowing surcharge or cess as an expenditure. This removes uncertainty and offers to grant immunity from penalty, if the taxpayer suo moto makes good the tax payment. Resultantly, the assessee’s income would no longer be considered as under-reported.
Further, in cases where the said deduction has been claimed and allowed previously, it is now proposed to give powers to the tax authority to treat the same as a mistake apparent on record and rectify the said orders, which may open a pandora box.
The writer is Director, Nangia Andersen LLP. With inputs from Suhaanvi Sood.