• The Indian economy, after growing at 8.5 per cent and 7.5 per cent in the two previous years, is projected to grow at 8.1 per cent in the current year 2005-06.
• According to revised estimates for 2005-06, the revenue deficit for the current year will be only 2.6% and the fiscal deficit only 4.1% as against the estimated figures of 2.7% and 4.3% respectively.
• The total revenue receipts of the Central Government is estimated to be Rs.4034.65 billion and the revenue expenditure at Rs.4881.92 billion as envisaged in the General Budget of 2006-07.
• The revenue deficit is estimated at Rs.847.27 billion which is 2.1 per cent of the GDP. The fiscal deficit is estimated at Rs.1486.86 billion, which is 3.8 per cent of the GDP.
• It has been decided to de-block coal reserves of 20 billion tonnes for power projects.
• The definition of captive consumption will also be amended to allow coal mining by producers with firm supply contracts with steel, cement and power companies.
• The Government intends to award five ultra mega power projects of 4000 MW each before 31st December, 2006 .
• Empowered Committee to be set up for reforms in the Power Sector
• RS. 5.97 billion allocated for Non-Conventional energy resources
• With an objective of making India a preferred destination for the manufacturing of semi-conductors and other high technology IT products including Wafer; Assemble, Test and Manufacturing of semi-conductors; Flat LCD/OLED/Plasma Panel Displays; and Storage Devices, the Ministry of Information Technology will announce a Policy shortly.
• The India Infrastructure Finance Company Limited to create a window to provide equity participation and or viability gap funding to new ventures. The window will be open for three years in order to accelerate investment
• The limit on FII investment in Government securities would be increased from $1.75 billion to $2 billion and the limit on FII investment in corporate debt from $0.5 billion to $1.5 billion; the ceiling on aggregate investment would be raised by mutual funds in overseas instruments from $1 billion to $2 billion and the requirement of 10 per cent reciprocal share holding would be removed.
• A limited number of qualified Indian mutual funds to invest, cumulatively up to $1 billion, in overseas exchange traded funds would be allowed;
• The budget support for National Highways Development Programme (NHDP) enhanced from Rs. 93.20 billion to Rs. 99.45 billion in 2006-07.
• A special accelerated road development programme for the North-Eastern region, at an estimated cost of Rs. 46.18 billion has been approved.
• The Government has also decided to develop 1000 kms. of access-controlled Expressways. These will be on new alignment and built on Design, Build, Finance and Operate Model. The concessionaries will be selected through a global bidding process

• No change in Personal tax rates.
• Perquisite not to include the following in respect of insurance under any scheme approved by the IRDA: (i) any premium paid by employer to cover insurance on health of an employee or (ii) any sum reimbursed by the employer in respect of any premium paid by the employee to cover insurance on his / any family member’s health.
• Term deposits for a period exceeding five years with scheduled banks would be eligible for deduction under section 80C (subject to the overall limit of Rs.100,000) if the term deposits are issued by the scheduled bank in accordance with a scheme framed and notified by the Central Government
• The maximum amount of deduction under section 80CCC in respect of contribution to specified pension funds increased from Rs.10,000 to Rs.100,000 subject to the overall limit of Rs. 100,000

• No change in the Corporate Tax rates.
• Tax exemption on lease rentals paid to foreign government or foreign enterprise for leasing aircraft is available in respect of agreement entered up on or before 31 st March 2007 instead of 31 st March 2006 . 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 pursuant to Section 10(23G) has now been withdrawn.
• Premium paid by the employer for their employees under an insurance scheme of any insurer and which has been approved by the Insurance Regulatory and Development Authority (IRDA) shall be eligible for deduction.
• A clarificatory amendment has been made to the effect 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 specified institutions, and loans and advances from scheduled banks, if converted into loans and borrowings shall not be treated as actually paid and therefore shall not be allowed as a deduction from profits.
• Tax benefit shall be available to undertakings developing, operating and maintaining industrial parks by 31 st March 2009 .
• Tax benefit available to industrial undertakings in the power sector i.e. undertakings involved in generation, distribution of power, setting up/ modernization of distribution networks provided such undertakings commence their business on or before 31 st March 2010 instead of 31 st March 2006 .
• Co-operative banks, other than a primary agricultural credit society or a primary 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 pricing officer by determining the arms length price.
• Minimum Alternate Tax (MAT) rate has been increased from 7.5 per cent to 10 per cent. Carry forward and set-off of credit for MAT available upto seven assessment years instead of five years.
• In computing the “book profits” for the purposes of MAT, the ‘book profits’ shall be increased by (i) 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 and (ii) gains from transfer of long-term capital asset, being equity shares and equity oriented mutual fund units. The Securities Transaction Tax shall be included in calculating book profits for the purpose of MAT liability.
• 100% Export Oriented Units (EOU) and other taxpayers claiming a deduction of profits from specified activities in specified areas like development, operation/maintenance of infrastructure facilities, development of Special Economic Zones, power generation and distribution, operating multiplexes, convention centers, etc. shall be required to file their return of income within the specified due date in order to claim deduction of the eligible profits.
• The Assessing Officer (AO) has been granted powers to determine the expenditure incurred in relation to exempt income as per the methods to be prescribed by the Government in case the AO is not satisfied with the claim made by the taxpayer.

• Expenditure (i) on distribution of free samples of medicines or of medical equipment to Doctors and (ii) incurred on payment to brand ambassadors for promoting the sale of goods or services of the business of the employer are 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) for the purposes of FBT 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.
• Contribution by the employer to an approved superannuation fund to the extent of Rs.100,000 per employee excluded from FBT.

• The Constituency Allowance received by Members of Legislative Assemblies (MLA)’s has been fully exempted from tax as against the earlier limit of Rs. 2500 per month was exempt.
• 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 contributions received from such stock exchanges or members of the stock exchange.
• The definition of ‘equity oriented funds’ has been aligned with the definition of that term in relation to Securities Exchange Board of India and consequently, the mutual funds will be required 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.
• Capital gains exemptions available on account of investment in specified bonds in respect of gains arising on transfer of long-term capital assets restricted to investment in bonds issued on or after 1 st April 2006 by National Highways Authority of India and Rural Electrification Corporation Limited. Reinvestment 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) is now not eligible for availing capital gains exemptions.
• Deduction available on long-term capital gains tax on re-investment in specified equity shares has been deleted
• It has now been specified that a provident fund, in order to receive or retain recognition, it shall be of an establishment to which the provisions of the Employees Provident Funds and Miscellaneous Provisions Act, 1952 apply. The recognition granted to existing provident funds shall be withdrawn, if such funds do not satisfy the additional condition on or before 31 st March 2007.
• With effect from 1 st June 2006 , a new section has been introduced to allow statutory recognition to agreements entered into between specified Indian Association and a non-resident specified Association for grant of double taxation relief, for avoidance of double taxation, for exchange of information for the prevention 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.
• 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 profits, in addition to the existing credit for advance tax paid, TDS and TCS.
• Application for grant of exemption by any fund, trust, university or educational institution, hospital or other similar institution should be made during the financial year immediately preceding the assessment year from which the exemption is sought.
• 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 membership etc. has been scrapped with effect from assessment year 2006-07.
• Credit for Tax Collected at Source (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.
• Interest to be paid with effect from 1 st June 2006 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.
• Levy of interest for non-filing or late filing of return, non-payment or short payment 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 and this shall be effective from 1 st 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 and this shall be effective from 1 st June 2006 .
• 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 of return of income.
• 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 Central Government has been given the power, with effect from 1 st June 2006 , notify certain class or classes of person to apply for and obtain a Permanent Account Number (PAN).
• The Assessing Officer 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. This is effective from 1 st June 2006 .
• 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 st 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) under the scheme introduced with effect from 1 st 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 who are authorised to act as a TRP and will also specify their duties and obligations.
• 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 assessment year.
• Scrutiny notices issued beyond the time limit of twelve months for returns furnished in response to reassessment notice, during the period 1 st October 1991 to 30 th 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 st October 2005 in response to the reassessment notice.
• With effect from 1 st June 2006, time limits for completion of (i)assessments (including FBT and wealth tax assessment) reduced from two years to twenty one months (ii) assessments, reassessments in response to reassessment notice (including FBT and wealth tax reassessment) reduced from one year to nine months (iii) assessments (including FBT and wealth tax assessment), pursuant to the appellate orders, reduced from one year to nine months and (iv) block assessments reduced from two years to twenty one months
• Requirement to issue TDS or TCS certificates extended up to 31 st March 2008 .
• It shall be mandatory, with effect from 1 st June 2006 , to quote 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 / collection.
• Requirement to furnish annual TDS / TCS statement in the prescribed form by the income-tax authority or the authorized person deferred to 1 st April 2008 and consequently, credit for TDS / TCS to be granted on the basis of the annual TDS / TCS statement also deferred till 1 st 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.

Following services to become taxable effective from 1 st March 2006 consequent upon 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 institution or medical establishment by an Outdoor Caterer.

 Following services to be exempt from service tax effective from 1 st 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 laboratories 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% to 12% and effective service tax rate will go up from 10.20% to 12.24% (including Education Cess 2%).
• Value of taxable service proposed to include monetary value of consideration in kind and these have to be valued as per valuation rules to be prescribed.
• 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 are 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 broadcasters)
• Share transfer agent
• Ship management
• Sponsorship (excluding sports events)
• Transport by cruise ship
• Transport of containers by rail (excluding Indian Railways)

 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 substitution 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 deleted
• Service provided or to be provided by any unincorporated association or body of persons to its members proposed to be regarded as taxable service
• The newly inserted section 93A empowers the Central Government to grant rebate of service tax paid on input services used in the manufacturing or processing of goods and provision of services, which are exported
• Section 94, which gives powers to the Central Government to make rules, is also being amended so as to prescribe rules for rebate of service tax on export of goods or services

 Scope of the following existing services is proposed to be expanded from a date to be notified after enactment of Finance Bill, 2006:

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 consultant’s service: Consultancy in different areas of management
• 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, maintenance or repair" service): (i) Management of movable property, Erection, commissioning or installation service (ii) Erection, commissioning or installation of structures, whether or not pre-fabricated
• Consulting engineer’s service: Engineering consultancy services provided by any firm or body corporate
• Business auxiliary service: (i) Computerized data processing (ii) Technical testing and analysis service (iii) Clinical testing of drugs and formulations (other than testing or analysis for the purpose of determination of the nature of diseased condition, identification of a disease, prevention of any disease or any disorder in human beings or animals)

Amendments to be effective from 1 st 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 (i) import of goods exempted from BCD and CVD (ii) Petroleum crude, kerosene for PDS, LPG for domestic supply, petrol, diesel, coal, coke and petroleum gases and fuels falling under Chapter 27 (iii) Gold, silver, rough diamond, precious metals (iv) Fertilizers and input for fertilizers (v) imports under Export Promotion schemes at Nil rate of duty like Advance Licence, 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, and margarine 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%
• BCD on Carbon Black Feed Stock has been reduced from 12.5% to 10%
• BCD on Polyester chips has been reduced from 12.5% to 10%.
• Import of specified cancer and AIDS drugs exempted
• Customs duty on Coronary stents and coronary stent systems for use with cardiac catheter has been fully exempted from customs duty as well as additional CV duty of 4%
• 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

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).
• Excise Duty imposed on Packaged Software at 8%

 Reduction in Central Excise Duty (CED):

• CED on small cars with specified length and engine capacity reduced from 24 percent to 16 percent
• CED on aerated waters reduced from 24% to 16% with reduction in abatement
• CED 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%
• CED on condensed milk, ice cream, specified storage devices like DVD drives, flash and combo drives reduced from 16% to Nil
• Scented supari, where the retail sale price is declared on the packages and such retail sale price does not exceed 50 paisa per package has been fully exempted from central excise duty
• Candles have been fully exempted from central excise duty
• Specified building Bricks have been fully exempted from central excise duty
• Hand operated rubber roller machines and hand operated copra dryers have been fully exempted from central excise duty
• CED on specified papers reduced from 16% to 12%
• CED on OPC cement and PPC cement produced in specified small cements plants reduced from Rs. 400 Per MT to Rs. 250 Per MT
• CED on Tea reduced to Nil.