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High inflation: Token I-T exemption limit hike likely
January, 22nd 2010

The government is exploring an increase in the income-tax exemption limit for individuals to compensate for the recent spike in 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 discussions among policymakers as they debate ways to give some relief to households from rising prices. 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 budgetmaking process gathers pace.

It (the decision) will depend on revenue considerations that are weighing high on policymakers agenda as the government is under pressure to signal a return to fiscal consolidation, a government official told ET. The fiscal deficit for the current year is pegged at a 16-year high of 6.8%.

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 Union Budget 2008-09 followed by a token Rs 10,000 hike in the final budget for 2009-10, after the United Progressive Alliance came back to power last year. 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 level. Food inflation is running at over 18% right now.

Keeping the high inflation in view, there are expectations that the slabs would be increased, and provide some more income in the hands of people ... slab rates require a complete relook as the basic threshold is very low and the basic tax rate gets triggered at a very low income level in comparison with global practices, said Vikas Vasal, partner, KPMG.

There is also a thinking within the government 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.

The finance ministry is holding consultations with various departments and ministries on their anticipated expenditure for 2010-11 and is expected to arrive at a final figure in the first week of February.

No PAN, more tax

Get ready to cough up higher tax up front from the next fiscal in case you do not quote the Permanent Account Number (PAN) in transactions subject to tax deduction at source.

Tax at higher of the prescribed rate or 20% will be deducted on all transactions liable to TDS where the PAN of the deductee is not available, the finance ministry said in a statement on Wednesday. The provision will have major implications for small contractors, small businesses, professionals and investors who earn interest from fixed deposits.
The rate of TDS in these cases ranges from 1% to 10%. The new provision related to tax deduction at source (TDS) under the Income Tax Act 1961 will become applicable with effect from April 1.

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