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Govt weighs token increase in tax exemption limit
January, 21st 2010

The government is exploring an increase in the income-tax exemption limit for individuals to compensate for the high recent inflation, but revenue considerations and the fact that the limit was hiked sharply in 2008-09 could force it to maintain status quo or give just a token hike.

The proposal has figured in the preliminary discussions , as the policymakers debate ways to give some relief to households from high inflation. Retail inflation, as measured by the consumer price index for industrial workers, was 13.5% in November 2009. A decision is likely over the next three weeks as the budget-making process gathers pace.

It (the decision) will depend on the revenue considerations that are weighing high on the policymakers as the government is under pressure to signal its return to fiscal consolidation, a government official told ET.

In general, the trend is to give general relief to taxpayers and a marginal hike is unlikely to have any significant impact on the finances of the government especially if it is looking at hiking excise duty and service tax rates, said D K Joshi, principal economist at rating agency CRISIL.

The government had substantially hiked the exemption limit in the budget 2008-09 and a given a token Rs 10,000 hike in the final budget for 2009-10 , after the United Progressive Alliance came back to power in 2009 elections.

Over the four years to fiscal 2009-10 , the exemption limit has risen at a compounded average growth rate of 12.5%, well ahead of the inflation in this period but less than the current inflation. Food inflation is running at over 18% right now.

Keeping in view the high inflation, there are expectations from the FM to increase the slabs and provide some more income in the hands of people as economic relief... slab rates require a complete re-look as the basic threshold is very low and basic tax rate get triggered at a very low income level in comparison with global practices, said Vikas Vasal, partner, KPMG.

The new draft direct taxes code, which is also being given finishing touches with the government looking to introduce it in the budget session, proposes to exempt an individual from paying income tax if his income is upto Rs 1,60,000 a year.

Any income in excess of Rs 1.6 lakh and up to Rs 10 lakh would attract a rate of 10%. Besides, the code also proposes to raise investment limit to Rs 3 lakh from current Rs 1 lakh.

There is also thinking that since the new code proposes to include all perks, including that of government employees in the total income, the exemption limit needs to be raised and this budget may be an opportune time to at least indicate the government intent in that direction, officials said.

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