Analysis of Taxation Laws (Amendments) Ordinance , 2005

Analysis of Taxation Laws (Amendment) Ordinance, 2005
Dr. Tejinder Singh Rawal
Chartered Accountant
tsrawal@tsrawal.com
The President of India recently promulgated the Taxation Laws (Amendment) Ordinance, 2005 ( No. 4 of 2005, dated 31-10-2005) ostensibly to remove the glitches that were noticed during the implementation of the Finance Act, 2005. This article makes a detailed analysis of the amendments. The Ordinance takes effect immediately and the amendments are effective from the dates specified against various clauses.
Avoidance of grossing up of tax on lease rental of aircrafts, date changed:
Section 10(6BB) provides for avoidance of grossing up of tax paid by an Indian aircraft company in the following case, where:
     (i)  In the case  of the Government of a foreign State or a foreign enterprise
     (ii) deriving income from an Indian company engaged in the business of operation of aircraft,
      (iii) as a consideration of acquiring an aircraft or an aircraft engine

1. other than payment for providing spares, facilities or services in connection with the operation of leased aircraft


2. on lease under an agreement entered into after the 31st day of March, 1997 but before the 1st day of April, 1999 or entered into after 31st day of September, 2005 and approved by the Central Government in this behalf  


3. and taqx on such income is payable by such Indian company under the terms of that agreement to the Central Government


4. Explanation to the section provides that for the purposes of this clause, the expression "foreign enterprise" means a person who is a non-resident;

The Finance Act 2005 had extended the date from 30th Sept 2005 to 31st March 2005. Now Taxation Laws (Amendment) Ordinance, 2005 has changed this date to 31st of March, 2006.
The effect of this amendment is that with effect from 1st day of April, 2006, the assessee shall be able to avoid the grossing up of the tax paid in respect of agreements entered into after 31st March 2006 and approved by the Central Government.
Exemption from tax in respect of receipt of lease rental of aircrafts, date changed:
The existing S. 10(15A) provides for exemption from tax in respect of

1. any payment made, by an Indian company engaged in the business of operation of aircraft,


2. to acquire an aircraft or an aircraft engine


3. other than a payment for providing spares, facilities or services in connection with the operation of leased aircraft


4. on lease from the Government of a foreign State or a foreign enterprise under an agreement


5. not being an agreement entered into between the 1st day of April, 1997 and the 31st day of March, 1999


6. and approved by the Central Government in this behalf.


7. The Explanation to the section provides that for the purposes of this clause, the expression "foreign enterprise" means a person who is a non-resident;

The existing section provided that nothing contained in this clause shall apply to any such agreement entered into on or after the 1st day of October, 2005.  The Ordinance has extended this date to 1st day of April 2006

New subsections introduced in S. 10.

The Ordinance has inserted the following three sub-sections in section 10.

S. 10(39): Income from international sporting event in India
The newly inserted S. 10(39) provides for exemption from tax any specified income arising from international sporting events held in India. Details of the section are as under:

1. The exemption is in respect of any specified income; The Explanation to the section defines   “the specified income” to mean the income, of the nature and to the extent arising from the international sporting event, which the Central Government may notify in this behalf;


2. arising from any international sporting event;


3. held in India;


4. The exemption being available to person or persons notified by the Central Government in the Official Gazette;


5. Such sporting event should be approved by the international body regulating the international sport relating to such event;


6. Such sporting event should have participation by more than two countries; and


7. Such sporting event should be notified by the Central Government in the Official Gazette for the purpose of this clause.

The other two amendments pertain to a company engaged in the business of generation, transmission, or distribution of power as under:
Income of subsidiary company of a power company:
Newly inserted clause (40) of section 10 exempts from tax any

1. income of any subsidiary company by way of grant or otherwise received from an Indian company,


2. being its holding company engaged in the business of generation, transmission of distribution of power


3. if such receipt is for settlement of dues in connection with reconstruction or revival of an existing business of power generation


4. Provided that the provisions of this clause shall apply is reconstruction or revival of any existing business of power generation is by way of transfer of such business to the Indian company notified under sub-clause (a) of clause (v) of sub-section (4) of section 80-IA;

Income from transfer of capital assets of power companies exempt:
Newly inserted Clause (41) provides for exemption of any income arising from

1. transfer of a capital asset,


2. being an asset of an undertaking engaged in the business of generation, transmission of distribution of power


3. where such transfer is effected on or before the 31st day of March, 2006 to the Indian Company notified under sub-clause (a) of clause (v) of sub-section (4) of section 80-IA.’.

Section 80-IA, extended to a company set up for reconstruction of a power generating unit:
Section 80 IA has been amended to extend the concession under section 80-IA to an undertaking owned by an Indian company and set up for reconstruction or revival of a power generating plant.
The amendment inserts the clause (v) in sub-section 4 of section 80-IA as follows:

1. The existing Sub-section 4 of section 80-IA lists the undertakings to which section 80-IA applies. The new clause has included in this list an undertaking owned by an Indian company and set up for reconstruction or revival of a power generating plant,


2. If such Indian company is formed before the 30th day of November, 2005, with majority equity participation by public sector companies for the purposes of enforcing the security interest of the lenders to the company owning the power generating plant and such India company is notified before the 31st day of December, 2005 by the Central Government for the purposes of this clause;


3. And such undertaking begins to generate or transmit or distribute power before the 31st day of March, 2007.


4. This amendment shall apply with effect from the 1st day of April, 2006

Amendment to the provisions pertaining to Fringe Benefits Tax
Section 115W, as it originally stood, defined “employer” in clause (a) as under:
115W. In this Chapter, unless the context otherwise requires,—

• “employer” means,—


• a company;


• a firm;


• an association of persons or a body of individuals, whether incorporated or not, but excluding any fund or trust or institution eligible for exemption under clause (23C) of section 10 or registered under section 12AA;


• a local authority; and


• every artificial juridical person, not falling within any of the preceding sub-clauses;


• “fringe benefit tax” or “tax” means the tax chargeable under section 115WA.

With effect of 1st April, 2006, the sub-clause (iii) has been amended. The original sub-clause included in the definition of employer, an association of persons or a body of individuals, whether incorporated or not, but excluding any This definition now stands modified to delete the exclusion of any fund or trust or institution eligible for exemption under clause (23C) of section 10 or registered under section 12AA. S. 10(23C) contains the list of educational, medical and other institutions whose income is exempt from tax. Section 12AA provides the procedure of registration of trusts and institutions. With this amendment, such institutions are apparently also brought within the ambit of FBT.
However the new Proviso to the section exempts such institutions by providing that any person eligible for exemption under clause (23C) of section 10 or registered under section 12AA or a political party registered under section 29A of the Representation of the People Act, 1951 (43 of 1951) shall not be deemed to be an employer for the purposes of this Chapter

Amendment pertaining to Banking Cash Transaction Tax
The definition section of the Banking Cash Transaction Tax is section 94. This section stands amended with effect from 1st June, 2005 as under:
Insertion of new clause (3A) to section 94 defines a banking company, which was not defined in the original law. A “banking company” means a company to which the Banking Regulation Act, 1949 (10 of 1949) applies and includes any bank referred to in section 51 of that Act;’
Clause (4A) now defines a  “co-operative bank” to  have the meaning assigned to it in Part V of the Banking Regulation Act, 1949 (10 of 1949);

Inter-bank transactions excluded:
New section 112A has been  inserted in Chapter VII of the Finance Act, 2005. “112A. The effect of this amendment is that the  provisions of the law pertaining to Banking Cash Transaction Tax  shall not apply to, or in relation to, the taxable banking transactions entered into on or after the 1st day of June, 2005, between a scheduled bank and a banking company or a co-operative bank; or between a scheduled bank and another scheduled bank. This is to remove the practical difficulties that the banks were facing in inter-bank transactions.