Direct Taxes

28 Feb 2006


Personal Income Tax
No change in rates of personal income tax.
No new taxes imposed.
One-by-six scheme abolished.

Corporate tax

  • No change in rates of corporate income tax.
  • Marginal revision in certain tax rates in the interest of equity:
    • Minimum Alternate Tax (MAT) rate increased from 7.5 per cent of book profits to 10 per cent — one-third of the normal rate.
    • Long-term capital gains arising out of securities included in calculating book profits.
    • Period to take credit for MAT increased from five years to seven years.
  • STT: Increase of 25 per cent, across the board.
  • Section 80IA of the IT Act applies to infrastructure facilities:
  • Terminal date for developing an industrial park extended from March 31, 2006 to March 31, 2009.
  • For the power sector, the date extended to March 31, 2010.


  • Fixed deposits in scheduled banks: For a term of not less than five years, included in section 80C.
  • Pension funds: Limit of Rs10,000 removed in section 80CCC, subject to an overall ceiling of Rs100,000.
  • Open-ended equity-oriented mutual funds: Definition aligned with the definition adopted by SEBI. Open-ended equity-oriented schemes and close-ended equity-oriented schemes to be treated on par for exemption from dividend distribution tax.
  • Cooperative banks: Exemption from tax under section 80P removed. Primary agricultural credit cocieties and primary cooperative agricultural and rural development banks continue to be exempt.
  • Exemption under section 10(23G) removed.
  • Scope of section 54EC restricted to two institutions: NHAI and REC. NABARD, SIDBI and NHB are banks; zero coupon bonds to raise low cost funds already allowed. Support to be provided id required. Benefit of section 54ED withdrawn with effect from April 1, 2006.
  • Anonymous or pseudonymous donations to wholly charitable institutions to be taxed at the highest marginal rate:
    • Donations to partly religious and partly charitable institutions / trusts to be taxed only if the donation is specifically for an educational or medical purpose.
    • Donations to wholly religious institutions and religious trusts not covered by the new provision.

Fringe benefit tax
FBT is justified on the principles of horizontal and vertical equity.
The following changes are proposed:

  • 'Tour and travel' benefit valued at 5 per cent instead of 20 per cent.
  • 'Hospitality' and 'use of hotel boarding and lodging facilities' in case of airline and shipping industry at 5 per cent instead of 20 per cent.
  • Free samples of medicines and medical equipment distributed to doctors excluded.
  • Expenses incurred on brand ambassador and celebrity endorsement excluded.
  • Approved superannuation fund: Employer's contribution in excess of Rs100,000 per year per employee to attract FBT under section 115WB(1)(c). Under section 80C, contribution by an employee up to Rs100,000 is already exempt.


  • Constituency allowances of MLAs to be treated at par with MP's constituency allowance.
  • PAN: Returns (AIR) on high-value transactions shows 60 per cent transactions are without quoting PAN:
    • Power to issue PAN suo moto in certain cases.
    • To direct persons to apply for PAN in certain cases.
    • More transactions to be notified for which quoting of PAN to be mandatory.
    • More transactions to be prescribed to be reported in AIRs.

Banking Cash Transaction Tax (BCTT) to continue, till AIR system is able to capture all significant financial transactions.

Modernising tax administration

  • Departments of Income Tax and Customs & Central Excise to undergo business process
  • reengineering (BPR).
  • Nationwide network to connect 745 IT offices in 510 cities, and 550 customs and central excise offices in 245 cities.
  • National databases, national data centres, data warehousing facilities and disaster recovery sites being set up.
  • Jurisdiction-free filing of returns, online tracking of account status and IT refunds will be possible.
  • Risk management system and electronic data interchange (EDI) in the Customs department to reduce dwell time for cargo.
  • E-payment of customs and excise duties to be possible.
  • Both departments to have fully computerised networks by end 2006.
  • A statement on revenue foregone (tax expenditure statement) capturing departures from the normal tax regime introduced.

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