The Direct Taxes Code (DTC) bill is not likely to be tabled in the Budget session of Parliament as a limited fiscal space is making it difficult for the finance ministry to accept the Parliamentary standing committee’s recommendations on tax largesse for tax payers.

Though the ministry has found merit in most of the recommendations of the standing committee on finance, headed by Bharatiya Janata Party leader Yashwant Sinha, it is not comfortable with the suggestion of keeping the threshold for tax exemption at Rs 3 lakh and significantly increasing the deduction limit for savings. The tax department is considering raising the first slab to Rs 2.5 lakh from Rs 2 lakh at present. Even at a threshold of Rs 2.5 lakh, the exchequer will get a hit of Rs 30,000 crore, according to an assessment of the finance ministry.

“Where is the fiscal space to give higher exemptions and deductions? If the limit is increased to Rs 3 lakh, most of the taxpayers will go out of the tax bracket,” a finance ministry official told Business Standard.

The official added that since an across-the-board increase in the exemption limit would erode the tax base, the government would try to protect small tax payers by making provision for tax credit in DTC.

In the Budget, the government has proposed to provide a tax credit of Rs 2,000 to every person with a total income of up to Rs 5 lakh. This will benefit 18 million tax payers, while the government will take a hit of about Rs 3,600 crore.

The finance ministry is of the view that the exemption limit of Rs 2 lakh is a little less than three times the per capita income, estimated for 2012-13.

About 72 per cent of the total 33 million taxpayers fall in the bracket of income up to Rs 2 lakh. If the slab is increased to Rs 3 lakh, nearly 87 per cent people will escape the tax net.

To minimise administration costs for the government and focus on higher income group taxpayers, the standing committee in its report had suggested four slabs of annual income of Rs 0-3 lakh (nil), Rs 3-10 lakh (10 per cent), Rs 10-20 lakh (20 per cent) and beyond Rs 20 lakh (30 per cent).

Tax collected in the income slab of 0-10 lakh is about Rs 21,094 crore from 27 million taxpayers. On the other hand, a tax of Rs 10,185 crore is collected from 3,35,000 taxpayers in the income slab of 10-20 lakh. There are 1,85,000 taxpayers paying a tax of Rs 53,170 crore in the slab of Rs 20 lakh and above.

The panel had also proposed that the deduction limit for investment in long-term savings should be increased from Rs 1 lakh to Rs 1.5 lakh and the overall deduction limit towards life insurance premium, health insurance premium and tuition fee should increased by Rs 1 lakh. Currently, deduction is allowed for health insurance premium up to Rs 15,000 for self and Rs 20,000 for dependent senior citizen parents.

The official explained if these exemptions are to be given, some other exemptions would have to be tweaked. This step may not be liked by the parliamentary panel. “The political atmosphere is not right,” he added.

The finance ministry has projected the Centre's fiscal deficit to come down to 4.8 per cent of gross domestic product in the current financial year from 5.2 per cent estimated for 2012-13.