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TMI BlogEXPLANATORY NOTES ON THE PROVISIONS OF THE FINANCE ACT, 2005X X X X Extracts X X X X X X X X Extracts X X X X ..... FB and Chapter XII-H in the Income-tax Act, 1961; (iv) omitted sections 80L, 88B, 88C and 88D of the Income-tax Act, 1961; (v) substituted new section for section 80E of the Income-tax Act; (vi) amended section 98 of the Finance (No.2) Act, 2004; and (vii) introduced a new levy namely, Banking Cash Transaction Tax Provisions relating to Banking Cash Transaction Tax introduced through Chapter VII of the Act along with consequential amendments in the Income-tax Act, 1961 have been explained separately through Circular No. 03/2005 dated 3rd June, 2005. Similarly, the provisions relating to Fringe Benefit Tax introduced through Chapters XII-H of the Income-tax Act, 1961 have been explained separately through Circular No.8/2005 dated 29th August, 2005. This circular explains the substance of other provisions of the Act relating to Direct Taxes. 2. RATE STRUCTURE 2.1 Rates of income-tax in respect of incomes liable to tax for the assessment year 2005-2006. 2.1.1 In respect of incomes of all categories of tax payers (corporate as well as non-corporate) liable to tax for the assessment year 2005-2006, the rates of income-tax have been specified in Part I of the First Schedule to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per cent. to ten per cent. 2.2.3 The tax deducted at source in each case shall be increased by a surcharge for purposes of the Union as follows: (i) in the case of every individual, Hindu undivided family, association of persons and body of individuals, at the rate of ten per cent. of such tax where the income or the aggregate of such incomes paid or likely to be paid and subject to deduction exceeds Rs.10,00,000/-; (ii) in the case of every firm, at the rate of ten per cent. of such tax; (iii) in the case of every artificial juridical person, at the rate of ten per cent. of such tax; (iv) in the case of every domestic company, at the rate of ten per cent. of such tax; and (v) in the case of every foreign company, at the rate of two and one-half per cent. of such tax. 2.2.4 No surcharge is to be levied on the amount of income tax deducted in the case of every co-operative society and local authority. 2.2.5 Education Cess - An additional surcharge called the Education Cess is to be levied at the rate of two per cent. on the amount of tax deducted, inclusive of surcharge if any. For instance, if the income-tax computed is Rs. 1,00,000/- and the surcharge is Rs. 10,000/-, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - or below. Marginal relief would be provided to ensure that the additional amount of income-tax payable, including surcharge, on the excess of income over Rs.10,00,000/- is limited to the amount by which the income is more than Rs.10,00,000/-. For instance, the amount of tax and surcharge on a total income of Rs. 10,20,000 calculated at the rates specified would have been Rs. 2,56,000 and Rs. 25,600 totaling to Rs. 2,81,600. The additional tax liability, as per this computation, incurred as compared to a person having a total income of Rs. 10,00,000 is Rs. 31,600. However, additional income as compared to a person having a total income of Rs. 10,00,000 is only Rs. 20,000. Therefore, a marginal relief is given to the extent of Rs. 11,600 in this case thereby providing that the additional tax liability cannot be more than the additional income. The total tax liability in this case will, therefore, be Rs. 2,76,000. 2.3.5 In the case of every artificial juridical person (other than a co-operative society, firm, local authority and company), surcharge would be levied at ten per cent. of the income-tax payable on all levels of income. 2.3.6 Education Cess - An additional surcharge cal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oreign companies. The tax payable by domestic companies would be enhanced by a surcharge at the rate of ten per cent. of the tax payable and in the case of foreign companies tax payable would be enhanced by a surcharge at the rate of two and one-half per cent. of the tax payable. The additional surcharge called Education Cess is to be levied at 2% on tax and surcharge in case of all companies. [Section 2 and First Schedule] 3. AMENDMENTS TO SECTIONS OF THE INCOME TAX ACT 3.1 Revival of exemption of interest in Non-Resident (External) Account - Section 10(4) (ii) of the I. T. Act deals with exemption of any income by way of interest on moneys standing to the credit of an individual in a Non-Resident (External) Account in any bank in India. Finance (No. 2) Act, 2004 had amended the said section so as to provide that such interest income paid or credited on or after 01-04-2005 shall not qualify for exemption. Section 4 of the Finance Act, 2005 has amended the said section so as to revive the exemption of such interest income for the period on or after 1st April, 2005. Applicability: From A.Y. 2006-07 onwards. [Section 4] 3.2 Revival of exemption of interest on Foreign Currency ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sub-section (1A) of section 10A, an undertaking set up in a Special Economic Zone, which begins to manufacture or produce articles or things or computer software after 31.3.2002, is allowed a hundred per cent. deduction of export profits for a period of five years followed by fifty per cent. deduction of such profits for the next two years, and thereafter a fifty percent deduction of export profits credited to a special reserve account, for the next three years. In order to ensure timely submission of returns claiming deduction under section 10A, a proviso has been inserted to provide that no deduction shall be allowed with regard to profits of an undertaking set up in any Special Economic Zone and claiming deduction under sub-section (1A) of section 10A if the return of income is not furnished by the due date specified under sub-section (1) of section 139 of the Income-tax Act. Applicability: From A.Y. 2006-07 onwards. [Section 5] 3.5 Elimination of Standard deduction for salaried tax payers. Under the existing provisions of section 16, in computing the income under the head Salaries, an assessee whose income from salary does not exceed rupees five lakhs, is allowed a dedu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the purpose of acquiring a new ship within a period of one year from the end of the previous year in which such sale or transfer took place, the sale proceeds are deemed to be the profits of the assessment year immediately following the previous year in which the ship was sold or transferred. A new ship is acquired by a shipping company not only by utilising the reserves but also by resorting to loans and other finances. When a ship so acquired is sold or transferred, taxation of the whole of the sale proceeds would imply taxation of loans and other finances which has never been the intention. The legislative intention, in essence, has always been to tax only reserves utilised for acquiring the ship. The Finance Act, 2005 has amended the said sub-section (4) so as to provide that only so much of the sale proceeds which represent the amount credited to the reserve account and utilised for acquisition of the ship would be deemed as profits. Applicability: With retrospective effect from A.Y. 2004-05 and subsequent assessment years. [Section 9] 3.8 Extension of weighted deduction for expenditure incurred on in-house R&D Under the existing provisions contained in sub-sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nancial Year Deduction available to employer when he pays Rs. 10 lakhs in first year, Rs. 15 lakhs in the second and balance Rs. 5 lakhs in the third year (in Rs. lakhs) 2004-05 2 2005-06 2 3 2006-07 2 3 1 2007-08 2 3 1 2008-09 2 3 1 2009-10 3 1 2010-11 1 Applicability:With retrospective effect from A.Y. 2004-05 and subsequent assessment years. [Section 11] 3.10 Excluding trading in derivatives on recognised stock exchanges from the ambit of speculative transactions Existing provisions of clause (5) of section 43 define speculative transaction to mean a transaction in which a contract for the purchase or sale of any commodity including stocks and shares is settled otherwise than by the actual delivery or transfer of the commodity or scrips. The proviso to section 43(5) lists out certain transactions which are not deemed to be speculative transactions. Systemic and technological changes introduced by SEBI have resulted in sufficient transparency in the stock markets and have to a large extent curbed the scope for generating fictitious losses through artificial transactions or shifting of incidence of loss from one person to another. The screen base ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uired it, as increased by the cost of any improvement of the asset incurred or borne by the previous owner or the assessee, as the case may be. Applicability: With retrospective effect from A.Y. 2005-06 and subsequent years. [Sections 8, 15, 16 & 19] 3.12 Speculation losses allowed to be carried forward for four years Under the existing provisions contained in sub-section (4) of section 73 no loss computed in respect of a speculation business is allowed to be carried forward for more than eight assessment years immediately succeeding the assessment year for which such loss was first computed. Finance Act, 2005 has amended the said sub-section (4) so as to reduce the period of loss to be carried forward from eight assessment years to four assessment years. Applicability: From A.Y. 2006-07 onwards. [Section 20] 3.13 Rationalisation of the tax treatment of savings. The existing method of taxing financial savings is distortionary resulting in economic inefficiency and inequity. With a view to removing such distortionary effects, there is a move towards shifting to the EET(Exempt Exempt Tax) method of taxation of such financial savings. However, the shift from the exi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is allowed to an individual on account of any amount paid by him in the previous year by way of repayment of loan, or interest on such loan, taken from any financial institution or any approved charitable institution for the purpose of pursuing higher education. The deduction is available for eight assessment years beginning from the assessment year relevant to the previous year in which the repayment of loan or interest thereon begins. In order to encourage the pursuit of higher studies, section 80E has been substituted so as to provide that the entire amount of interest paid by an individual during the previous year on the loan taken from any financial institution or any approved charitable institution for the purposes of pursuing higher education, shall be allowed as a deduction from the total income. However, no deduction shall be allowed for repayment of the principal loan amount. The deduction shall be allowed for eight assessment years beginning from the assessment year relevant to the previous year in which the payment of interest on the loan begins. Applicability: From A.Y. 2006-07 onwards. [Section 25] 3.15 Extension of tax benefits for developing, operating, mainta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... promote industrial development of the State of Jammu and Kashmir, the terminal date for setting up of industrial undertakings and commencement of eligible business in the State has been extended by two more years, from 31.3.2005 to 31.3.2007. Applicability: From A.Y. 2006-07 onwards. [Section 27] 3.17 Extension of the time limit for the purpose of tax holiday under section 80-IB to any company carrying on scientific research and development. Under the existing provisions of sub-section (8A) of section 80-IB, a company carrying on scientific research and development is allowed a hundred per cent deduction of the profits and gains of such business for a period of ten assessment years, if such company- (i) is registered in India (ii) has the main object of scientific & industrial research and development (iii) is approved by the Secretary, Department of Scientific and Industrial Research, Ministry of Science and Technology, before 1st April, 2005 and fulfils the conditions prescribed by the Board. With a view to promote scientific research and development in the country, the time period for approval of the companies carrying on scientific research and development, by the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s infrastructure capital company and infrastructure capital fund shall have the same meanings respectively assigned to them in clauses (a) and (b) of Explanation (1) to clause (23G) of section 10. Clause (47) of section 2 has been amended so as to include maturity or redemption of a zero coupon bond in the definition of the term transfer. Clause (42A) of section 2 has also been amended providing that where a zero coupon bond is held as a capital asset for a period of not more than twelve months, it shall be treated as a short term capital asset. Section 112 has been amended so as to bring parity with the other securities for the purposes of calculating tax on long term capital gains arising from transfer of zero coupon bonds. Thus, where the tax payable in respect of long-term capital gain arising from transfer of a zero coupon bond exceeds ten per cent. of the amount of capital gains without indexing i.e., before giving effect to the provisions of second proviso to section 48, then such excess shall be ignored. A new clause (iiia) has been inserted in section 36 providing that the infrastructure capital company or infrastructure capital fund or public sector company whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the existing provisions contained in the said clause (b), the royalty or fees for technical services received in pursuance of an agreement made on or before 31st May, 1997 is taxable at the rate of thirty per cent. and where such royalty or fees for technical services is received in pursuance of an agreement made after 31st May, 1997, the same is taxable at twenty per cent. The said clause (b) of sub-section (1) has been amended so as to reduce the said tax rate from twenty per cent. to ten per cent. on royalty or fees for technical services received in pursuance of an agreement made on or after 1st June, 2005. The rate of tax now applicable will be as follows: Agreement entered into during Rate of tax 01-04-1976 to 31-05-1997 30 % 01-06-1997 to 31-05-2005 20 % On or after 01-06-2005 10 % Consequential amendments in Part II of the First Schedule to the Finance Act, 2005 were also made reducing the rates for deduction of tax at source in the case of royalty or fees for technical services from twenty per cent. to ten per cent. Applicability: From A.Y. 2006-07 onwards. [Section 34 and First Schedule] 3.23 Allowing tax credit for MAT paid under section 115JB again ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 07 and 20 belongs to A.Y. 2009-10. In view of provisions of sub-section (3) of section 115JAA the credit of 30 will not be allowable after A.Y. 2011-12 and would accordingly lapse. However, credit of 20 pertaining to A.Y. 2009-10 would be allowed to be carried forward till A.Y. 2014-15. Applicability: From A.Y. 2006-07 onwards. [Section 35] 3.24 Dredgers to be treated as qualifying ship for the purpose of Tonnage Tax Scheme Chapter XII-G provides for special provisions for taxation of the income of shipping companies from qualifying ships. Section 115VD in that Chapter lists out the conditions fulfillment of which renders a ship as a qualifying ship. The section further excludes dredgers from the category of qualifying ships. Representations were received pointing out that inland dredging companies also face international competition and need a level playing field. On an appreciation of such representations, clause (vii), excluding dredgers from the list of qualifying ship has been omitted through the Finance Act, 2005. The amendment has the effect of rendering dredgers as qualifying ships for the purposes of tonnage tax scheme. Applicability: From A.Y. 2006-07 onwards. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re-assessment of total income of the assessment year relevant to the previous year in which search is conducted or requisition under section 132A is made, within a period of two years from the end of the financial year in which the last of the authorizations for search under section 132 or requisition under section 132A was executed. The time limit provided in the aforesaid clauses (a) and (b) is also applicable for making assessment or re-assessment in the case of other person referred to in section 153C. With a view to rationalize the above provisions in respect of the other person referred to in section 153C, a proviso has been inserted in sub-section (1) of the said section 153B providing that in the case of such other person the time limit for making assessment or re-assessment of total income of the assessment years referred to in clauses (a) and (b) of the said sub-section shall be two years from the end of the financial year in which the last of the authorizations for search under section 132 or for requisition under section 132A was executed or one year from the end of the financial year in which books of account or documents or assets seized or requisitioned are hand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome of such other person for such assessment year in the manner provided in 153A. The provisions of the newly inserted sub-section (2) would apply where books of account or documents or assets seized or requisitioned referred to in sub-section (1) of the said section 153C, have been received by the Assessing Officer having jurisdiction over such other person after the due date for furnishing the return of income under sub-section (1) of section 139 for the assessment year relevant to the previous year in which search is conducted u/s 132 or requisition is made under section 132A. In other words, the amendments brought in section 153B and section 153C shall have the following effects in relation to assessment or reassessment in case of other persons referred to in section 153C:- (i) A period of one year from the end of financial year in which the books of account or documents or assets seized or requisitioned are handed over to the Assessing Officer having jurisdiction over such other person shall be available for the purposes of making assessment or reassessment under section 153A; (ii) Any assessment or reassessment for any assessment year falling within a period of six asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lying, hiring or leasing goods carriages, to a sub-contractor being an individual and owning upto two goods carriages at any time during the previous year. The sub-contractor (transporter) needs to furnish a declaration in the prescribed Form to the person paying or crediting. The person making payment to the sub-contractor without deduction of tax at source is also required to furnish to the income-tax authority the prescribed particulars in the prescribed Form within the prescribed time. The notification prescribing the rules and the Forms to be furnished by the sub-contractor and the contractor [i.e., Rule 29D and Form Nos. 15-I and 15J of the Income-tax Rules, 1962] was published in the Official Gazette on 17th June, 2005 vide S. O. No. 855(E). This amendment is applicable from 1st June, 2005. [Section 49] 3.28 Demat provisions of TDS / TCS - Tax deductor/collector not to issue TDS/TCS certificate and return of income not to be accompanied by TDS/TCS certificate for taxes deducted on or after 1st April, 2006 Existing provisions in respect of taxes deducted or collected on or after 1st April, 2005 provide for the following regarding issuance of TDS or TCS certificates :- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the Financial Year 2005-06 (A.Y. 2006-07). However, for the taxes collected on or after 1st April, 2006, the collectee is not required to enclose the TCS certificate with the return of income (from A.Y. 2007-08 onwards). 199(3) and the Proviso to 206C(4) For the taxes deducted during the Financial Year 2005-06, credit for TDS will be given on the basis of the TDS certificate accompanying the return. However, credit for the taxes deducted on or after 1st April, 2006 will be given on the basis of annual statement of taxes accessible to the Assessing Officer. For the taxes collected during the Financial Year 2005-06, credit for TCS will be given on the basis of the TCS certificate accompanying the return. However, credit for the taxes collected on or after 1st April, 2006 will be given on the basis of annual statement of taxes accessible to the Assessing Officer. [Sections 40, 50, 51 and 53] 3.29 Furnishing of quarterly return in respect of payment of interest to residents without deduction of tax Under the existing provisions of section 194A(3), no deduction of tax is required to be made on credit or payment of interest on time deposits with a Banking Company, time depo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing provisions of Chapter VII of the Finance (No.2) Act, 2004 provide for levy of a securities transaction tax on the value of transactions in respect of specified securities. With a view to mobilize additional resources and plug revenue leakages, the Act has increased the rates for levy of the securities transaction tax with effect from 1st June, 2005. The new rates are as follows:- S. No. Taxable securities transaction Old rate (before 01-06-2005) New rate (on or after 01-06-2005) 1 purchase of an equity share in a company or a unit of an equity oriented fund, entered in a recognized stock exchange and settled by actual delivery or transfer of such share or unit 0.075 % 0.1% 2 sale of an equity share in a company or a unit of an equity oriented fund, entered in a recognized stock exchange and settled by actual delivery or transfer of such share or unit 0.075 % 0.1% 3 non-delivery based sale of an equity share in a company or a unit of an equity oriented fund, entered in a recognized stock exchange 0.015 % 0.02% 4 transactions of derivatives being option or future, entered in a recognized stock exchange 0.01 % 0.0133% 5 sale of units of an equity-orie ..... X X X X Extracts X X X X X X X X Extracts X X X X
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