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Rising indirect tax collections give scope for income tax sops
February, 26th 2016

At a time when consumer spending is subdued in India, ensuring a rise in disposable income by increasing the tax exemption limit to Rs 3 lakh from Rs 2.5 lakh in the union budget would add Rs 5,000-15,000 in the assessee’s kitty, depending up on his tax bracket. This could act as a fillip for electronic and household items, consumer products among others. Effectively, the amount of Rs 5,000-15,000 would mean a sum of Rs 25,000-75,000 crore keeping in mind the 5 crore assessee filing annual tax return.

An increase in eligible tax deduction limit will also lead to higher savings in financial instruments such as government infra bonds, which could boost public infra spending, and investment; as well lend a huge push to the country’s capital market.

The budget is also expected to increase the limit for eligible deduction under Section 80C, 80CCC and 80CCD, the extra money in the common man’s pocket will result in higher consumer spending or higher financial savings, translating into a win-win situation for the economy.

The exemption limit to honest tax payers would also motivate more number of citizens to come under the ambit of filing returns and thereby improve the tax to GDP ratio, which in India is dismally low at 17% compared to developed countries.

Currently, the combined limit permissible for such deduction stands at Rs 2 lakh under Section 80C and 80CCD after the government introduce an additional deduction of Rs 50,000 for contribution to the New Pension Scheme (NPS) under section 80CCD. NPS is an important vehicle to channelize savings in long term investments. A reasonable rise of Rs 25,000-50,000 can be expected keeping mind the government’s intention to use National Pension Scheme to strengthen the social security net for public at large.

Announcing the recommendations of the 7th Pay commission, the Finance Secretary then had indicated that the government will also look at programs and products to channelize the pay increases towards more productive long term-investments.

During the year under review, the direct tax collections are going short as per the budget estimates stated last year which are being compensated by indirect taxes. The decline in crude oil prices will continue to give the necessary leeway to the finance minister to increase his focus on indirect taxes and compensate the same by way of lower direct taxes that could help him allow the sops in terms of basic exemption limits as also by way of tax exemption investments.

 
 
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