INDIA

Budget 2006 Highlights

TA X

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Foreword
The Budget presented by the Finance Minister on 28 February 2006 turned out to be a little sweet-sad comedy where nothing substantial seems to have been attempted in the field of tax. The good news is that there are no changes in tax rates or new taxes have been introduced but the fact remains that Minimum Alternate Tax (MAT) has increased from 7.5 per cent to 10 per cent. So also, there is an increase in Securities Transaction Tax (STT) by 25 per cent. More importantly, there is no mention of removal of the surcharge that has been historically introduced, ostensibly for temporary periods but has remained a fixed part of the effective tax rate mechanism. Also, an important exemption [under Section 10(23G) of the Income-tax Act, 1961 (the Act)] pertaining to interest and capital gain tax exemption in respect of investments in Infrastructure companies has been summarily removed. This appears to be perhaps a hasty step as keeping in mind the tremendous growth in infrastructure required in the country, there is a pressing need to incentivise investments in infrastructure. While, the industry did not get its wish for abolishment of Fringe Benefit Tax (FBT) the clarifications thereon are welcome. Perhaps, in line with the exemption provided for brand celebrity endorsement, free samples etc., sales promotion expenditure too ought to have been exempted from the rigours of FBT. Looking for the sliver lining, the proposal to exempt contribution to superannuation funds to the extent of Rs. 100,000 from FBT in line with the tax deduction limit under section 80C is welcome. The Banking sector seems to have got its wish of investments in Fixed Deposits in Scheduled Banks (maturity over 5 years) being included under section 80C deduction to bring back in the investors. Lastly, the removal of sub limit of Rs.10,000 on account of pension fund contribution within the overall limit of Rs. 1 Lac under section 80CCE is a welcome move designed to benefit smaller tax payers. The speculation that the Banking Cash Transaction Tax (BCTT) will be given a quiet send off has also been laid to rest with the FM making it clear that it is here to stay at least for the time being.

Contents
Direct Tax Corporate Tax FBT Personal Tax 3 3 4 5

Other Tax Provisions 5 Indirect Tax Service Tax Customs Central Excise Duty 9 9 12 13

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Direct Tax
Corporate Tax
No change in the tax rates. Time limit for tax exemption on lease rentals paid to foreign government or foreign enterprise for leasing aircraft is extended in respect of agreement entered up to 31 March 2007. Thereafter, benefit of exemption from tax on tax borne by the Indian entity will be available. Exemption granted in respect of dividend, interest or long term capital gains received by the infrastructure capital funds / company / co-operative banks investing or providing long term finance to infrastructure projects has now been withdrawn. The 100% Export Oriented Unit (EOU)s shall now be required to file their return of income within due date in order to claim deduction of the eligible profits. The Assessing Officer (AO) has been granted powers to determine the expenditure incurred in relation to exempt income as per the methods to be prescribed in case the AO is not satisfied with the claim of the taxpayer. Premium paid by the employer for their employees under an insurance scheme of any other insurer and approved by the Insurance Regulatory and Development Authority (IRDA) will be eligible for deduction. It has been clarified that taxes paid outside India and eligible for tax relief against the tax payable in India cannot be claimed as deduction against the income of the taxpayer. It has been clarified that unpaid interest on loans or borrowings, from specified institutions, and loans and advances from scheduled banks, if converted into loans and borrowings will not be treated as actually paid and hence will not be allowed as a deduction. Taxpayers claiming a deduction of profits from specified activities in specified areas e.g. development, operation/maintenance of infrastructure facilities, development of Special Economic Zones, power generation and distribution, operating multiplexes, convention centers, etc. must file their returns of income within the statutory due date in order to be eligible for such deduction. This has been made mandatory from assessment year 2006-07.

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Tax benefit available to undertakings developing, operating, maintaining industrial parks is extended. The extended benefit will be available to undertakings developing, operating, maintaining the industrial parks by 31 March 2009. Tax benefit available to industrial undertakings in the power sector i.e. undertakings involved in generation, distribution of power, setting up/ modernization of distribution networks is extended. The benefit will now be available to undertakings commencing their business up to 31 March 2010 from the earlier time limit of 31 March 2006. Co-operative banks, other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank are now required to pay tax on income from banking activities. Deduction of profits derived from exports by units in Special Economic Zones will not be allowed to the extent of the income enhanced by the transfer pricing officer by determining the arms length price. Minimum Alternate Tax (MAT) rate marginally increased from 7.5 per cent to 10 per cent. Carry forward and set-off of credit for MAT extended from five to seven assessment years. MAT provisions amended with the purpose to increase the book profits by the additional amount of depreciation on account of incremental amount of the assets, due to revaluation of the assets, debited to the Profit & Loss Account. Gains from transfer of long-term capital asset, being equity shares and equity oriented mutual fund units, and subject to STT to be included in calculating book profits for the purpose of MAT liability.

Fringe Benefit Tax (FBT)

Expenditure on distribution of free samples of medicines or of medical equipment to Doctors not to be included in the category of Sales promotion including publicity for the purpose of valuation of Fringe benefit. Expenses incurred on payment to person of repute for promoting the sale of goods or services of the business of the employer not to be included in the category of Sales promotion including publicity for the purpose of valuation of Fringe benefit. The valuation of Tour and travel (including foreign travel) reduced from 20 per cent to 5 per cent. Benefit or amenity provided by way of free or subsidized transport or such allowance to employees for journeys between the place of residence and place of work excluded from FBT.

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Contribution by the employer to an approved superannuation fund to the extent of Rs.100,000 per employee excluded from FBT.

Personal Tax
No change in tax rates. Perquisite not to include the following in respect of insurance under any scheme approved by the IRDA: - any premium paid by employer to cover insurance on health of an employee; or - any sum reimbursed by the employer in respect of any premium paid by the employee to cover insurance on his / any family members health. Term deposits for a period exceeding five years with scheduled banks allowed as deduction under section 80C. The maximum amount of deduction under section 80CCC in respect of contribution to certain pension funds increased from Rs.10,000 to Rs.100,000 subject to overall limit of Rs. 100,000 under section 80CCE.

Other Tax Provisions

The Constituency Allowance received by Minister of the Legislative Assembly (MLA)s has been fully exempted from tax. Earlier any allowance to the extent of Rs. 2500 per month was exempt. Application for grant of exemption by any fund, trust, university or educational institution, hospital or other similar institution should be made during the financial year immediately preceding the assessment year from which the exemption is sought. In case of Investor Protection Fund set up by recognized stock exchanges in India, exemption from income is now restricted only to the extent of contributions received from such stock exchanges or members of the stock exchange. The definition of equity oriented funds aligned with the definition contained in SEBI (with effect from 1 June 2006). This means that the mutual funds will need to invest at least 65% of their investible funds in the equity shares of the Indian companies. Specified income arising to a non-profit body or authority as notified by the Central Government under a multi-lateral treaty, agreement or convention will be exempt.

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Capital gains exemptions arising on transfer of long-term capital assets available for investment in bonds issued on or after 1 April 2006 by National Highways Authority of India and Rural Electrification Corporation Limited. Reinvestment in the bonds issued by National Bank for Agriculture and Rural Development (NABARD), National Housing Bank (NHB) and Small Industries Development Bank of India (SIDBI) now not available. Deduction available on long-term capital gains tax on re-investment in specified equity shares has been deleted An additional condition introduced for the provident funds to receive or retain recognition, is that the fund shall be of an establishment to whom the provisions of the Employees Provident Funds and Miscellaneous Provisions Act, 1952 apply. The recognition granted to existing provident funds shall be withdrawn, if such funds do not satisfy the additional condition on or before 31 March 2007. With effect from 1 June 2006, a new section has been introduced to give statutory recognition to agreements entered into between specified Indian Association and a non-resident specified Association for grant of double taxation relief, for avoidance of double taxation, for exchange of information for the prevention of evasion or avoidance of income tax or for recovery of income tax. The provisions of the Act will apply to the extent they are more beneficial than the provisions of the agreement. It is also clarified that a higher charge of tax on the foreign entity will not be considered as discrimination against such entity. Anonymous donations received by education institutions, hospitals, and trusts and institutions (other than wholly for religious and charitable purposes without specification for use of donations for education and medical purposes) are chargeable to tax at the maximum marginal rate of thirty percent. Any income-tax authority may, on being directed by the Central Board of Direct Taxes (CBDT), exercise the powers and perform the functions of an income tax authority ranked lower than him. This amendment has been brought in from retrospective effect from 1 April 1988. The one-by-six scheme requiring the return of income to be filed in case expenditure had been incurred on certain items like foreign travel, club membership etc. has been scrapped with effect from assessment year 2006-07. CBDT has been granted power to dispense with any of the conditions to be satisfied for a return to be a valid return for any class or class of persons. It is further granted the power to include any of such conditions in the form of return of income. With the intention of collecting any information relevant for the purpose of the Act the Central Government may, with effect from 1 June 2006, notify certain

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class or classes of person to apply for and obtain a Permanent Account Number (PAN). The AO with effect from 1 June 2006, has been given the powers to issue a PAN, in accordance with a procedure to be notified, to any person, whether tax is payable by him or not after considering the nature of the transaction. PAN of the payee to be quoted on all quarterly statements prepared for taxes deducted at source under the various provisions of the Act with effect from 1 June 2006. A new scheme enabling taxpayers, other than a company or a person in whose case a tax audit is required, to prepare and furnish their returns of income through a Tax Return Preparer (TRP) scheme introduced with effect from 1 June 2006. The scheme shall specify the manner in which the TRP shall assist the taxpayers and also makes it obligatory for the TRP to affix his signature to the return. The scheme will specify the persons authorised to act as a TRP and will also specify inter alia the duties and obligations of the TRP. Self-assessment tax to be computed after reducing relief allowed for taxes paid in other countries and tax credit available against MAT paid on book profits, in addition to the existing credit for advance tax paid, TDS and TCS. In case where no returns have been filed till the expiry of assessment year, the AO is now empowered to issue notice even after the expiry of the assessment year. Scrutiny notices issued beyond the time limit of twelve months for returns furnished in response to reassessment notice, during the period 1 October 1991 to 30 September 2005 would be deemed to be valid. However, the said notice to be issued before completion of reassessment. Scrutiny notice to be issued within one year of filing the returns after 1 October 2005 in response to the reassessment notice. Time limit for completion of assessments (including FBT and wealth tax assessment) reduced from two years to twenty one months (with effect from 1 June 2006). Time limit for completion of assessments, reassessments in response to reassessment notice (including FBT and wealth tax reassessment) reduced from one year to nine months (with effect from 1 June 2006). Time limit for completion of assessments (including FBT and wealth tax assessment), pursuant to the appellate orders, reduced from one year to nine months (with effect from 1 June 2006). Time limit for completion of block assessments reduced from two years to twenty one months (with effect from 1 June 2006).

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Credit for TCS allowed on filing of TCS certificate subsequent to the return filed within the period of two years from the end of the assessment year in which the income is assessable. Consequently, non-filing of TCS certificates along with the return filed shall not render the return filed as defective. Payment of interest on failure or delay in deduction or collection of whole or part of tax to be by way of self-assessment before filing quarterly statement (with effect from 1 June 2006). Requirement to issue TDS or TCS certificates extended up to 31 March 2008. Mandatory quoting of Permanent Account Number of the deductees, Tax Deduction Account Number, Tax Collection Account Number or Tax Deduction & Collection Account Number in quarterly statements of tax deduction / collection (with effect from 1 June 2006). Requirement to furnish annual TDS / TCS statement in the prescribed form by the income-tax authority or the authorized person deferred to 1 April 2008. Consequently, credit for TDS / TCS to be granted on the basis of the annual TDS / TCS statement deferred to 1 April 2008. Failure by a person to collect whole or part of the tax or to pay the whole or part of the tax collected shall deem such person to be an assessee in default. Requirement of filing annual TDS / TCS returns in respect of tax deductible / collectible after 1 April 2005, deleted. Levy of interest for non-filing or late filing of return, non-payment or short payment of advance tax or deferment in payment of advance tax to be computed after reducing relief allowed for taxes paid in other countries and tax credit available against MAT paid on book profits, in addition to the existing credit for advance tax paid, TDS and TCS. Levy of interest for default in collection and payment of tax is on the person responsible for collecting tax and not only on the Seller. Levy of penalty for failure to collect the whole or part of TCS to the extent of the tax not collected. Provisions to appeal against the penalty order provided. Levy of penalty for failure to submit quarterly statements of TDS and TCS within the prescribed time limit restricted to lower of Rs. 100 per day of default or amount of tax deductible or collectible (with effect from 1 June 2006). Levy of penalty of Rs. 10,000 for quoting false Tax Deduction Account Number, Tax Collection Account Number or Tax Deduction & Collection Account Number in any prescribed document (with effect from 1 June 2006).

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Securities transaction tax increased by 25% over previous year with effect from 1 June 2006. All of the above provisions are applicable for the assessment year 2007-08 unless specified otherwise.

Indirect Tax
Service Tax
Following services to become taxable effective from 1 March 2006 consequent to withdrawal of exemptions: Services of Call Centre and Medical Transcription Centre. Services of Chartered Accountant / Company Secretary / Cost Accountant. ERP software system services provided by a Management Consultant. Re-insurance premium and all business for which premium is booked outside India covered under General Insurance Service. Services provided on a railway train or in the premises of an academic institution or medical establishment by an Outdoor Caterer.

Following services to be exempt from service tax effective from 1 March 2006: 90% of interest element of finance leases and hire-purchase covered under the category of Banking and Other Financial Services. Water quality testing by Government owned State and District level laboratories covered under Technical Testing and Analysis Service. All taxable services provided by Reserve Bank of India.

Following amendments are proposed to be effective from enactment of Finance Bill, 2006: Rate of service tax proposed to be increased from 10.20% to 12.24% (including Education Cess 2%). Value of taxable service proposed to include monetary value of consideration in kind - valuation rules to be prescribed.

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Scope of matters referable to Authority for Advance Rulings proposed to be expanded to include determination of liability to service tax.

Following fifteen new services proposed to be brought in the tax net from a date to be notified after enactment of Finance Bill, 2006: Auctioneers Automated Teller Machine operations, maintenance or management Business support services (including infrastructure support) Credit card, debit card, charge card or other payment cards related service International air transport passenger service (excluding economy class) Internet telephony Public relations service Recovery agents Registrar to an Issue Sale of space or time for advertisement (excluding print media and broadcasters) Share transfer agent Ship management Sponsorship (excluding sports events) Transport by cruise ship Transport of containers by rail (excluding Indian Railways)

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Scope for following ten existing services proposed to be expanded from a date to be notified after enactment of Finance Bill, 2006: Service category Banking and other financial services To include Transfer of money through different modes by any person Services provided as banker to an issue Consultancy in different areas of management

Management consultants service General insurance service Life Insurance service Insurance auxiliary service concerning General as well as Life Insurance Service Maintenance or repair service (to be renamed as "management, maintenance or repair" service) Erection, commissioning or installation service Consulting engineers service

Service provided to a policy holder or any person by an insurer, including a re-insurer

Management of movable property

Erection, commissioning or installation of structures, whether or not pre-fabricated Engineering consultancy services provided by any firm or body corporate Computerized data processing Clinical testing of drugs and formulations (other than testing or analysis for the purpose of determination of the nature of diseased condition, identification of a disease, prevention of any disease or any disorder in human beings or animals)

Business auxiliary service Technical testing and analysis service

Following amendments are proposed to be effective from a date to be notified after enactment of Finance Bill, 2006: Scope proposed to be expanded for seventeen existing services by substitution of the words commercial concern by any person New charging section proposed to be introduced for codifying reverse charge mechanism in relation to services received from outside India by recipient in India and consequently Explanation to Section 65(105) proposed to be deleted Service provided or to be provided by any unincorporated association or body of persons to its members proposed to be regarded as taxable service)

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Customs
Amendments to be effective from 1 March 2006 Peak rate of basic customs duty (BCD) on non agricultural products reduced from 15% to 12.5% Additional Duty of Customs (ADC) @ 4% imposed on all imports in addition to ITA bound items - ADC eligible for CENVAT credit to manufacturers - Gold Jewellery to attract reduced rate of 1% - ADC exemption granted on import of goods exempted from BCD and CVD Petroleum crude, kerosene for PDS, LPG for domestic supply, petrol, diesel, coal, coke and petroleum gases and fuels falling under Chapter 27 Gold, silver, rough diamond, precious metals Fertilizers and input for fertilizers imports under Export Promotion schemes at Nil rate of duty like Advance Licence, clearances of goods by EOU/ SEZ units on which sales tax / VAT is not applicable Basic Customs duty increased on import of vanaspati, bakery shortening, margarine from 30% to 80%

Reduction of Basic Customs duty rates: Manmade fibres, filament/ spun yarns, DMT, PTA,MEG, Caprolactum and specified textile machinery reduced from 15% to 10% Naptha and petroleum coke reduced from 10% to 5% Import of specified cancer and AIDS drugs exempted BCD rate reduced to 5% on import of specified bulk drugs, diagnostic kits and equipments Project Import benefit granted to pipeline projects for transportation of crude, petroleum products and natural gas

Amendments proposed to be effective from enactment of Finance Bill 2006 Amendment proposed for non relinquishment of title to goods by importer will not be allowed if any offence is suspected

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Central Excise Duty

Amendments to be effective from 1 March 2006 Chapter notes introduced in the Central Excise Tariff Act, 1985 for deeming specified processes as manufacture for the purposes of central excise duty Excise duty on clearance of goods from Export Oriented Units, Software Technology Park Units and Electronic Hardware Technology Park Units to Domestic Tariff Area changed from 50 percent of aggregate custom duties to 25 percent of the basic custom duty plus excise duty as applicable on like goods Cess on crude oil increased from Rs. 1800 per MT to Rs. 2500 per MT Exemption from Additional Duty of Excise (Goods of Special Importance) (AED) provided to goods covered under AED (Sugar, Tobacco and Textiles).

Reduction in Central Excise Duty: on small cars with specified length and engine capacity reduced from 24 percent to 16 percent on aerated waters reduced from 24% to 16% with reduction in abatement on ready to eat packaged food, biscuits & wafer biscuits, MP3 and MPEG 4 Player , CFC lamps, man made filament yarn and fibres reduced from 16% to 8% on condensed milk, ice cream, specified storage devices like DVD drives, flash and combo drives reduced from 16% to Nil on specified papers reduced from 16% to 12% on OPC cement and PPC cement produced in specified small cements plants reduced from Rs. 400 Per MT to Rs. 250 Per MT on Tea reduced to Nil.

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Increase in Central Excise Duty: Excise duty on computers imposed @ 12% Excise duty on packaged software imposed @ 8% Excise duty on set top boxes imposed @ 16% Excise duty on specified wood articles, roofing tiles imposed @ 8%

Amendments proposed to be effective from enactment of Finance Bill 2006 Advance Ruling provisions extended to determination of liability to pay excise duty on goods

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