Budget 2006 Highlights by KPMG

8/4/2019 Budget 2006 Highlights by KPMG

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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 histori-

cally 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 sum-

marily 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, theremoval of sub limit of Rs.10,000 on account of pension fund contribu-

tion within the overall limit of Rs. 1 Lac under section 80CCE is a wel-

come 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.

Page 2 of 14

Contents

Direct Tax 3

Corporate Tax 3

FBT 4

Personal Tax 5

Other Tax Provisions 5

Indirect Tax 9

Service Tax 9

Customs 12

Central Excise Duty 13


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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 expen-

diture incurred in relation to exempt income as per the methods to be pre-

scribed 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 speci-

fied institutions, and loans and advances from scheduled banks, if convertedinto 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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Direct Tax


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Tax benefit available to undertakings developing, operating, maintaining indus-

trial 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. under-

takings 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 pri-

mary 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 pric-

ing 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 equip-

ment to Doctors not to be included in the category of Sales promotion includ-

ing 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 employ-

ee; 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 contri-

bution to certain pension funds increased from Rs.10,000 to Rs.100,000 sub-ject 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 finan-

cial year immediately preceding the assessment year from which the exemp-

tion 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 contribu-

tions 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 avail-

able for investment in bonds issued on or after 1 April 2006 by National

Highways Authority of India and Rural Electrification Corporation Limited. Re-

investment 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 speci-

fied 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 provi-

sions of the Employees Provident Funds and Miscellaneous Provisions Act,

1952 apply. The recognition granted to existing provident funds shall be with-

drawn, 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 taxa-

tion relief, for avoidance of double taxation, for exchange of information for theprevention 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 mem-

bership 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 ofreturn 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 prof-its, 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 assess-

ment year.

Scrutiny notices issued beyond the time limit of twelve months for returns fur-

nished 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 ninemonths (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 / collec-

tion (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 pay-

ment 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 TaxService 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 institu-

tion 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 laborato-

ries 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% (includ-

ing 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 broadcast-

ers)

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:

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 substitu-

tion 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 delet-

ed

Service provided or to be provided by any unincorporated association or body

of persons to its members proposed to be regarded as taxable service)

Service category To include

Banking and other financial services Transfer of money through different

modes by any person

Services provided as banker to an

issue

Management consultants service Consultancy in different areas of man-

agement

General insurance service

Service provided to a policy holder or

any person by an insurer, including a

re-insurer

Life Insurance service

Insurance auxiliary service concerning

General as well as Life Insurance

Service

Maintenance or repair service (to be

renamed as "management, mainte-

nance or repair" service)

Management of movable property

Erection, commissioning or installation

service

Erection, commissioning or installation

of structures, whether or not pre-fabri-

cated

Consulting engineers service Engineering consultancy services pro-vided by any firm or body corporate

Business auxiliary service Computerized data processing

Technical testing and analysis service Clinical testing of drugs and formula-

tions (other than testing or analysis for

the purpose of determination of the

nature of diseased condition, identifi-

cation of a disease, prevention of anydisease or any disorder in human

beings or animals)

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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 AdvanceLicence, 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, mar-

garine 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 per-

cent 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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For further information, contact:

Mumbai

KPMG House, Kamala Mills Compound

448, Senapati Bapat Marg,

Lower Parel, Mumbai 400 013

Telephone: +91 22 24913131

Fax: +91 22 24913132

Delhi

4B, DLF Corporate Park

DLF City, Phase III

Gurgaon 122 002

Telephone: +91 124 2549191

Fax: +91 124 2549101

BangaloreMaruthi Info-Tech Centre

11-12/1, Inner Ring Road

Koramangala, Bangalore 560 071

Phone: +91 80 41766000

Fax: +91 80 41766999

Chennai

Wescare Towers

16 Cenotaph Road,Teynampet

Chennai 600 018

Telephone: +91 44 24332533

Fax: +91 44 24348856

Hyderabad

II Floor, Merchant Towers

Road No. 4, Banjara Hills

Hyderabad 500 034

Telephone: +91 40 23350060

Fax: +91 40 23350070

KolkataPark Plaza, Block F, Floor 6

71 Park Street

Kolkata 700 016

Telephone: +91 33 22172858

Fax: +91 33 22172868

Pune

703, Godrej Castlemaine

Bund Garden

Pune - 411 001

Telephone: +91 20 30585764/65

Fax: +91 20 30585775

2006 KPMG, the Indian member firm of

KPMG International, a Swiss cooperative.

All rights reserved. Printed in India.

The information contained herein is of a general nature and is not intended to address the circumstances of

any particular individual or entity. Although we endeavor to provide accurate and timely information, there can

be no guarantee that such information is accurate as of the date it is received or that it will continue to be

accurate in the future. No one should act on such information without appropriate professional advice after a

thorough examination of the particular situation.

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