Despite contributing only about 35% to the direct tax kitty, personal income tax-related announcements by the finance minister are awaited the most since they affect almost 70% of all taxpayers. It can, in fact, make or break the government, because it concerns the general public.

And finance minister P Chidambaram knows this only too well. So, he will prefer to save the major changes in personal income tax structure that would benefit the aam admi for the next Budget, which will also be the last full Budget before the general elections.

In Budget 2006-07, he had, in fact, left the income tax as well as corporate tax rates completely unchanged. So the three basic tax slabs of 10%, 20% and 30% depending on an individuals income continued. Income tax rates in India are in consonance with the global average of about 34%. In fact, income tax rates in China, France, Germany and United States are much higher and range from about 5% to 40%.

Most tax experts feel that income tax rates in India do not need to be reviewed. Gaurav Taneja, tax partner Ernst and Young said, The FM doesnt need to tinker with personal income tax rates at least at present. But he should allow people to save according to their needs by increasing the basic exemption limit and remove all other exemptions.

However, in the coming fiscal Chidambaram will not completely ignore individual taxpayers and is likely to bring in some measure of relief to them especially in view of the record direct tax collections this year as well as the problems caused by inflation.

One of the key proposals being considered by the finance minister is to withdraw or at least ease the 10% tax surcharge on individuals. At present, a10% surcharge on income exceeding Rs 10 lakh for individual taxpayers is applicable. The income bracket for the surcharge had been increased in this years budget from Rs 8.5 lakh, making it applicable on a lesser number of people. The removal of the 10% surcharge would lower the tax rate by 3%.

Eye on I-T
One key proposal under review is to withdraw or ease the 10% tax surcharge on individuals
North Block may increase limit on savings qualifying for I-T deduction from Rs 1 lakh to Rs 1.5 lakh
The Direct Tax Code is likely to be introduced and will bring about changes in the direct tax system
 
With the buoyancy in tax collections, Chidamabram had promised a re-look at the tax structure. While direct tax collections till February 19 stood at Rs 1,63,423 crore, personal income tax collections (including fringe benefit tax) registered a 29.2% growth to stand at Rs 57,844 crore for the period.

Another more urgent reason for the re-look at direct tax rates in Budget 2007-08, is the fear of prices spiraling out of control. Inflation in the last fortnight has reached a two-year high of 6.73%, before marginally declining to 6.63% last Friday. This has worried the government so much that it announced a mini-Budget of sorts in late January and slashed customs duty on a number of edible oils, maize, etc., as well as banned forward trading in some essential commodities.

The government is also now reconsidering its direct tax proposals, with the PMO greatly in favour of reviewing tax rates or alternatively restructuring tax slabs. North Block has also been thinking of increasing the limit on savings that qualify for income-tax deduction from Rs 1 lakh to Rs 1.5 lakh. The move will not only help increase domestic savings but would also leave more money in the hands of the taxpayers. This would come in handy, especially if price rise continues unabated.

A proposal to restructure tax slabs is also being discussed by the finance ministry. Alternatively this may be considered in Budget 2008-09 or may be introduced as a part of the Direct Tax Code. The Direct Tax Code is likely to be introduced in the Budget session of the Parliament and will bring about major changes in the direct tax system.