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Govt may enhance Income - Tax exemption limit in coming Budget
January, 31st 2011

The government may advance by a year the roll out of some of the income tax measures proposed in the Direct Taxes Code (DTC) to provide relief to inflation-hit households.

These measures may form part of the forthcoming budget. "Some measures in the code could be advanced," a senior government official said on condition of anonymity. The DTC is expected to come into force from April 2012.

The thinking within the finance ministry is that some relief should be provided to common households in view of the high inflation by raising the personal income tax exemption limit, the official said.

Under the current rules, income up to 1.6 lakh is exempt from tax for individuals. For women and senior citizens, the limit is 1.9 lakh and 2.4 lakh, respectively. The DTC Bill was introduced in Parliament last year. It proposes an I-T exemption limit of 2 lakh.

The budget for the ongoing fiscal year had not raised the basic exemption limit and the one for the previous year had increased it only by 10,000.

The plan to advance some of the DTC proposals comes as the government battles mounting price pressures at home. India's food inflation has remained in double-digits for most of the past year and has played a key role in pushing up the headline inflation. Food inflation for December stood at 15.5%. The wholesale price index rose an annual 8.43% in the month. The finance minister could also recast the income tax slabs.

The DTC Bill has proposed changes in the slabs.

At present, income over 8 lakh attracts the highest slab of 30%. The Bill has proposed the 30% rate for income in excess of 10 lakh.

However, since the budget for the current year had sharply widened the tax slabs, it is likely the government may just go for an increase in the basic exemption limit without rearranging the slabs, according to some experts. A slab rearrangement helps taxpayers already under the tax net.

"A rise in the basic exemption limit would help people at the lower strata of society while widening of existing tax slabs will help people in low income groups already covered under the tax net," said Vikas Vasal , executive director at KPMG . Since the tax slabs were recast last year only, it would make sense to go for an increase in the exemption limit.

But some experts are of the view that fiscal constraints may restrain the government from giving away too much in the current year.

The fiscal responsibility framework proposed by the government seeks to cut the fiscal deficit to 4.8% in 2011-12 as against 5.5% budgeted in the current year.

The government also needs to set aside more for its flagship schemes, such as the Mahatma Gandhi National Rural Employment Guarantee Act and the Food Security Act . Moreover, unlike the current year when the government had a 1 lakh crore bonanza from the sale of 3G and broadband spectrum, in the next fiscal it would have to rely mostly on borrowings and tax collections to fund its expenditure.

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