Education Cess is an additional levy imposed by the government on the basic tax liability of an assessee to generate extra revenue. This revenue, as suggested by its name, would then be used to fund primary, secondary, and higher education. Education cess should be paid by every taxpayer, irrespective of their type, i.e., corporate or non-corporate. The rate at which the cess should be paid would be determined by the annual budget, and currently, it is 3% and shall be paid on the amount of income tax plus surcharge (if any).
Utilisation of the Fund
The fund, generated through education cess from taxpayers, will be utilised by the government for the development and improvement of the country’s educational infrastructure. It will also be used to improve the quality of education provided to the country’s masses, along with enhancing their health and living standards through the arrangement of midday meals, the opening of new colleges and schools, which are being established under the government.
This fund is also used to provide educational loans for students from disadvantaged or low-income backgrounds, so that they are given equal opportunities to gain a quality education. It is also utilised for the payment of salaries to staff and faculty working in government-funded schools, colleges, and other educational institutions, along with funding specialised schemes for students.
Computation of Educational Cess
Under the education cess, there are two variants: education cess and secondary and higher secondary education cess. This, in total, i.e., 3% shall be applied on the income tax plus surcharge amount, if any. A health cess of 1% will also be added to this, making the total 5%.
To illustrate this, let’s consider an individual earning INR 6,00,000 per year. Out of this, there is an allowable deduction of, say, INR 50,000, under Section. 80C, making INR 5,50,000 taxable under the Income Tax Act. The normal tax on this amount would be equal to the following:
Tax on Total Income INR 27,500
Surcharge INR 0
Health and Education Cess INR 1,100 [27,500*4%]
Total Tax Payable INR 28,600
Education Cess Allowed as a Business Expense or Not?
We all know that the income tax paid by an assessee cannot be allowed as a business expense. However, whether this word’ income tax’ includes cess or not is a matter of question or debate. For deriving a conclusion on the same, a reference can be taken with respect to section 40(a)(ii) of the Income Tax Act, and the same would be read as under:
- Notwithstanding anything to the contrary in sections 30 to 41, the following amounts shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession
(a) in the case of any assessee—
(ii) any sum paid on account of rate on profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains.
Explanation 1 — For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, any sum paid on account of any rate or tax levied includes and shall be deemed always to have included any sum eligible for relief of tax under section 90 or, as the case may be, deduction from the Indian income-tax payable under section 91
Explanation 2 — For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, any sum paid on account of any rate or tax levied includes any sum eligible for relief of tax under section 90A
From the above said, it can be understood that any rate or tax which is levied on the profits and gains of business or profession, shall not be deducted while computing the income which is chargeable for taxation under the head profits and gains from business or profession. But it is also to be noted that the word cess is not specified in the section, nor is there a definition given for the same under the Income Tax Act. Thus, we can say that it has not been specifically and evidently provided that cess cannot be claimed as a deduction or business expense.
We can also refer to Circular No. 91/58/66-ITJ (19) dated 18.05.1967, which clearly states that the Cess shall not be disallowable. Further referring to the case of Sesa Goa Limited Vs. The Joint Commissioner of Income Tax (2020) held that education cess and higher and secondary education cess can be claimed as an expense while computing income under the head’ Profits and Gains from Business or Profession’.
Taking advantage of section 115JB, we can also understand that tax includes cess as levied by the Central Act for computing the book profit. But it should be understood and accepted that there is a significant difference between tax and cess, as the Income Tax Act and the concerned Authorities have made proper usage of the term Cess in all the relevant places.
Similarly, in the case of Chambal Fertilisers and Chemical Ltd. v. CIT-Range (2), Kota by its order dated 31.07.2018, held that cess and tax are not the same, due to which the same need not be disallowed as per section 40(a)(ii) while computing profits and gains from business or profession.
Contrary to all this,the Hon’ble Supreme Court in the case of Commissioner of Income-tax vs. K. Srinivasan [1972] 83 ITR 346 held that;
“……The meaning of surcharge is to charge in addition or to be subject to an additional or extra charge. If that meaning is applied to section 2 of the Finance Act, 1963, it would lead to the result that income-tax and super-tax were to be charged in four different ways or at four different rates which may be described as (i) the basic charge or rate (In Part I of the First Schedule); (ii) surcharge; (iii) special surcharge; and (iv) additional surcharge calculated in the manner provided in the Schedule. Read in this way, the additional charges form part of the income tax and super tax. According to the revenue, the word ‘surcharge’ has been used in Article 271 for the purpose of separating it from the basic charge of a tax or duty for the purposes of distributing the proceeds of the same between the Union and the States….”
In the light of the above statement, and referring to the memorandum of Finance Bill of 2004, it was mentioned that: “An additional surcharge, to be called the Education Cess to finance the Government’s commitment to universalize quality basic education, is proposed to be leviedon the amount of tax deducted or advance tax paid, inclusive of surcharge.”
Hence, we can conclude that education cess forms part of the income tax paid by an assessee, making it disallowable.
To Summarize
Alongside all the above statements, judgments, and reading of the sections, there are specific other points that we should consider as a reader and a taxpayer. If Cess is allowed as an expenditure to the taxpayer, the impact it creates on government tax collection will be substantial. And this, when allowed as a deduction or business expense, would lose the basic motive of such collection.
Hence, we hope that the same will be studied in depth by the CBDT (Central Board of Direct Taxes) to draw a conclusion on the matter, taking into account at least a prospective effect.
