Finance Minister Pranab Mukherjee could announce sweeping tax cuts for corporates and individuals when he presents the budget on Monday next week.
Sources told NDTV the proposals to cut corporate tax from 30 per cent to 25 per cent and increasing personal income tax exemption limit from Rs.1.5 lakh at present to Rs.2.5 lakh or more is being considered by the government. Strong growth in tax collections in the last few years has helped government ensure bouyancy in direct and indirect taxes. The government believes that improved tax compliance will make up for the revenue loss that it will have with the cut in the exemption limit.
NDTV has learnt that a cut in corporate tax is also being considered. However, the surcharge on corporate tax may not be done away with.
A proposal to revive the investment allowance, aimed at giving a boost to the manufacturing sector, is also being considered. Under the scheme, if a company decides to deploy additional cash for expanding capacity on 'generating employment', the amount is deductible from the taxable income of the company.
As of now, the govenrment is weighing between the options of a cut in corporate tax or reviving the concept of investment allowance. Finance Minsiter Pranab Mukherjee has to take a final call on the issue. Sources told NDTV that a final decision on these proposals will be taken at the highest level of the government in the next few days. A cut in corporate tax rate while keeping the surcharge could be one of the alternatives for the government.
Former Revenue Secretary S Narayan told NDTV that he is expecting tax breaks for the individual. "Tax cut would enhance consumer spending and it would improve tax compliance," he said.
"A proposal to initiate investment allowance will give boost to the manufacturing sector. It is a noble objective," BMR Advisors Managing Partner Mukesh Butani said.
Gas production is also expected to get special tax benefits which will bring it at par with crude oil production.
Another sector that could benefit from the largesse from the government is the hospitality sector. Market buzz has indicated that the government is considering giving hospitality sector the industry status, which could help attract more investments for the sector.
The concept of "investment allowance" was a policy of the government during the 1980s when the government wanted to encourage companies to invest in expanding capacity. With the pressure on growth, the government is hoping that the tax break could help to revive growth.
Finance Minister Pranab Mukherjee is to present the budget on July 6. The expectations of big announcements for the infrastructure sector and hopes of a revival in demand has pushed the Indian markets up by nearly 75 per cent since March 9, when the recent run of the market started.