budget 2006 highlights by kpmg
TRANSCRIPT
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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.
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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.
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