labels: economy - general, governance, union budget 2006
Changes affecting corporates and business entitiesnews
03 March 2006

Chartered accountants B K Vatsaraj and Mayur Kishnadwala explain the changes in the corporate tax proposals in the Budget proposals for 2006-07.

Fringe Benefit Tax (FBT):
The following amendments have been made:

  • At present, FBT is levied on the entire contribution to an approved superannuation fund made by the employer for employees. Effective Assessment Year (AY) 2007-08, employer's contribution to the said fund in excess of Rs100,000 per employee per year would be liable to FBT.
  • Under the existing provisions, expenditure on distribution of samples in any industry by the employer is considered as "sales promotion including publicity" and liable to FBT. As per the amendment, now, expenditure on distribution of free samples of medicines or of medical equipments to doctors. It may be noted that this concession is available only to pharmaceutical companies.
  • Also, payments to any person of repute (not defined !) i.e. a brand ambassador for promoting the sale of goods and services of the employer will not be liable to FBT.
  • Now, expenditure incurred by the employer on an employee's to and fro journey between the residence and office, free or subsidised transport or transport allowance, for that purpose is not liable to FBT
  • Fringe benefits attributable to the employee, on the expenditure incurred by the employer on tours and travels (including foreign travel), will now be considered at five per cent instead of 20 per cent earlier. However, the benefit attributable to conveyance expenses will continue to be 20 per cent.
  • It is now proposed that if the employer is in the airlines or shipping business carrying goods or passengers, then the value of fringe benefit attributable to the employees has been brought down from 20 per cent to five per cent of the expenditure incurred by the employer on providing such hospitality whether for food or beverages or in any other manner or use of hotel, boarding and lodging facilities

Minimum Alternate Tax (MAT) on companies - section 115JB:
Some far reaching changes have been made in this tax, effective A Y 2007-08, as under:

  • The MAT rate has been enhanced from the present 7.5 per cent to 10 per cent
  • Earlier, MAT was not chargeable on incomes exempt u/s 10. However, wherever applicable, it will now be payable on LTCG on securities exempt u/s 10(38). Correspondingly, expenses incurred to earn such income will now be deductible for MAT purposes.
Let it be noted that income tax is still not payable on the above LTCG under the normal provisions of Income tax.
  • The period for availing the MAT credit has been enhanced from the present five years to seven years - section 115JAA. The credit so allowed will also be considered while calculating interest u/s 234A, 234B and 234C, which is a relief to the assessee.
  • The normal book depreciation will only be allowed as deduction in calculation of MAT liability; any excess depreciation charged in accounts due to revaluation of fixed assets is to be ignored.

Withdrawal of section 10(23G):
The main activity of an infrastructure capital company or infrastructure capital fund is to make investments in companies carrying on the business of:

  • developing, maintaining, operating etc. various infrastructure projects defined in section 80IA(4),
  • developing special economic zones (SEZ) - 80IAB
  • developing and building housing projects u/s 80IB(10)
  • constructing certain specified hotels 80IB(7) or specified hospitals 80IB(11A)

Incomes (dividends, interest on loans advanced and long term capital gains on shares) received by such infrastructure capital company / fund were exempt from tax u/s 10(23G). Section 10(23G) is now proposed to be deleted effective AY 2007-08.

The implication of this amendment is that, the interest earned and long-term capital gains (LTCG) on shares on which the securities transaction tax (STT) is not paid, will now be taxable; of course the dividend received and LTCG on which STT is paid continue to be exempt u/s 10(33) and 10(38) respectively.

Conversion on interest payable to loan:
Section 43B allows deduction of certain expenses on "payment" basis. A loophole has been retrospectively plugged whereby, if any interest payable, on borrowing from any public financial institution or a state financial corporation or a state industrial investment corporation or a scheduled bank, is converted into a loan, then it cannot be argued that such interest is deemed to have been paid and hence deduction u/s 43B should be allowed.

Common expenses that cannot be allocated:
Section 14A provides that deduction will not be allowed of expenses incurred for earning exempt income. There has been considerable dispute regarding allocation of common expenses incurred for earning taxable as well as exempt income. The amendment, effective A Y 2007-08, provides that in all such cases, the income tax assessing officer (A O) shall mandatorily follow the method prescribed and allocate the expenses.

Withdrawal of exemption to co-operative banks:
Section 80P grants tax benefits to co-operative banks and co-operative societies engaged in certain specified business activities. As the co-operative banks function on par with other commercial banks who do not enjoy such exemption, this exemption is withdrawn effective A Y2007-08

Tax paid in foreign country on international operations:
An assessee having international operations might have paid taxes abroad on incomes earned there. In certain cases, such taxes paid are allowed to be adjusted / set off against its Indian tax liability. The taxes so paid will also be considered while calculating interest u/s 234A, 234B and 234C, which is a relief to the assessee.

However, section 40(a) (ii), effective A Y 2006-07 now provides that in such cases, the foreign taxes paid will not be allowed as expense in computing its business income as it results in double benefit.

Transfer pricing:
The provisions of transfer pricing, u/s 92C, relate to computation of arms length price (ALP) under the most appropriate method, which can be recomputed by the transfer pricing officer (TPO) at the time of assessment under certain conditions.

On such recomputation, the Total income of the assessee may be enhanced. Presently, the law provides that in cases of such enhancement, no additional deduction under chapter VIA (re. deductions from gross total income) or section 10A or 10B, regarding profits on exports, will be allowed. This restriction has now been rationally made applicable, effective A Y 2007-08, to assesses claiming deduction u/s 10AA (SEZ units) also.

Extension of time limits:
U/s 80IA(4)(iv), the deduction to power generating, distribution etc. company was available only if it started its activity on or before 31.3.2006; this limit has been extended to March 31,.2010

Similarly, u/s 80IA(4)(iii), deduction to an undertaking developing, maintaining, operating etc. an industrial park or SEZ was available if the activity started before March 31,.2006; this limit has been extended to March 31,.2009

also see : Procedural compliances
Direct tax proposals on expected lines

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Changes affecting corporates and business entities