Taxation Laws (Amendment) Act, 2006

Background

The Taxation Laws (Amendment) Bill, 2006 was passed by the Lok Sabha on May 17, 2006 and by Rajya Sabha on May 22, 2006. This Bill has now received the assent of the President and the same has been enacted on July 13, 2006. This Act amends provisions of both direct as well as indirect taxes, with the objective to simplify procedures, widening of taxbase and plugging of loopholes resulting in revenue leakage.

This news bulletin provides a brief overview of the key direct and indirect tax provisions of the Taxation Laws (Amendment) Act, 2006 (the TLA Act).

INCOME TAX

Order disallowing 10A/10B benefits shall be rectified upon subsequent receipt of foreign exchange

Section 10A / 10B / 10BA of the Act provides that the deduction should not be allowed when income has not been received in convertible foreign exchange in India or has not been brought into India in the specified manner.

The TLA Act provides that if subsequently such income is received or brought into India in the specified manner; the Assessing Officer shall amend the order of assessment so as to allow deduction under section 10A / 10B / 10BA, in respect of such income as is so received or brought into India.

The period of 4 years for rectification of assessment under section 154 shall be reckoned from the end of the previous year in which such income is so received or brought into India.

This amendment comes into effect from July 13, 2006.
TDS on Renting of Plant, Machinery, Furniture, fittings, etc.

Under section 194-I of the Act, tax needs to be withheld on any payment to residents under any lease, sub-lease, tenancy or any other agreement or arrangement for the use of any land or any building (including factory building), together with furniture, fittings and the land appurtenant thereto.

Section 194-I of the Act has now been amended to provide that tax needs to be withheld from any payment under the above referred arrangement for the use of (either separately or together) any of the following:

	land
	building (including factory building)
	land appurtenant to a building (including factory building)
	machinery
	plant
	equipment
	furniture
	fittings

This amendment comes into effect from July 13, 2006.
TDS on Royalty and Non-compete fees

Under the provisions of section 194J, tax is required to be deducted at source @ 5% (excluding cess and surcharge) on fees for professional / technical services paid / payable to residents on amounts exceeding Rs. 20,000.

The TLA Act has widened the scope of section 194J by providing that now tax also needs to be deducted on royalty¹and non-compete fees² .

This amendment comes into effect from July 13, 2006.

Disallowance for non-deduction of tax extended to rent and royalty

Under the provisions of section 40(a)(ia), non-deduction of tax on interest, commission / brokerage, fees for professional services or fees for technical services, or amounts payable to a contractor or subcontractor, results in disallowance.

The disallowance related provisions have been extended to rent and royalty paid / payable if taxes are not deducted at source with effect from assessment year 2006-07. However, it is to be noted that, there was no requirement to deduct tax on credit / payment of royalty as well as lease rent for use of plant, machinery, equipment, furniture, fittings during the corresponding financial year 2005-06.
Gift provisions amended

The Finance Act, 2004 introduced taxation on certain gifts as income. Section 56(2)(v) provides that any sum of money exceeding Rs. 25,000 received without consideration by individual / HUF shall be chargeable to tax.

The TLA Act has restricted the applicability of above provisions to amounts received before April 1, 2006 only. Further, it has introduced a similar set of provisions from April 1, 2006 which provides that where any sum of money, the aggregate value of which exceeds Rs. 50,000, is received without consideration by an individual /HUF in any previous year from any person or persons; the whole of the aggregate value of such sum shall be chargeable to tax.

It also provides that both the above referred provisions will continue to remain non-applicable to any sum of money received from any relative, or on occasion of marriage, under a will or inheritance or in contemplation of death of payer. It is further provided that the above referred provisions will also not be applicable to any sum of money received from local authority³ , specified fund / institution⁴ or from specified trust⁵ .

Revision of penalty order on the basis of appellate/court orders

The TLA Act has amended section 275 to provide that in case where assessment or other order is subject-matter of an appeal before the appellate authorities / Courts or subject-matter of revision before Commissioner and a penalty order (imposing / enhancing / reducing / canceling / dropping the penalty proceedings) is passed before passing of the above orders by the appellate authorities / Courts; then such penalty order may be revised on the basis of such orders.

However, such penalty order shall be revised –

	Only after the assessee has been given a reasonable opportunity of being heard
	Within 6 months from the end of the month in which the above referred orders are passed

This amendment comes into effect from July 13, 2006.