FinMin Logic On I-T Rates Under Scanner

New Delhi, June 27 | Updated: Jun 28 2004, 05:58am hrs
Finance minister P Chidambaram is under pressure to justify cream-skimming and status quoism over income-tax slabs from experts, industry chambers and the Institute of Chartered Accountants of India (ICAI). These were last changed seven years ago. Income-tax collections have doubled since then.

There is a case for adjusting the income-tax slabs, argues Dr Shankar Acharya, former chief economic advisor (CEA) at FinMin. Rs 50,000 in 1998 is not the same as Rs 50,000 today, Acharya says.

Tax expert R N Lakhotia is angrier. Static income-tax slabs have failed to take care of inflation, eroding the value of rupee and realistic salary/income levels. People will start evading taxes if the rates are not adjusted by Mr Chidambaram, he warns. Rs 50,000 in 1998 would at least be Rs 75,000 to Rs 80,000 now taking into account the capital gains indexation methodology.

While income-tax slabs and rates have been frozen, collections doubled from about Rs 20,000 crore in 1998-99 to more than Rs 40,000 crore in 2003-04.

The ICAI wants Chidambaram to increase the exemption limit to Rs 75,000. It has also suggested that the highest tax rate of 30 per cent should apply to those having an income of more than Rs 2.5 lakh as against Rs 1.5 lakh now.

Ficci expects the exemption limit raised to Rs 1 lakh and the highest rate reserved for those having an income of more than Rs 10 lakh. CII wants exemption limits raised to Rs 1.5 lakh and the highest rate made applicable to those earning more than Rs 5 lakh.

Lakhotia suggests its time to do away with the applicability of 15 or 20 per cent rebate depending upon the level of income. These funny distinctions do not help anyone. The standard deduction, he said, should at least be raised to Rs 50,000.

The Kelkar committee on direct taxes (December 2002), which was only accepted by the government in parts, had suggested raising of the income- tax exemption limit to Rs 1 lakh. The highest slab, according to the report, should apply to those earning more than Rs 4 lakh per annum. The committee, however, suggested simultaneous abolition of standard deduction and various rebates on savings.

In 1997, as finance minister in the United Front government, Chidambaram fixed the income-tax rates at 10 per cent, 20 per cent and 30 per cent.

He pegged the income-tax exemption limit at Rs 40,000 (this was raised to Rs 50,000 next year) and placed those with income of more than Rs 1.5 lakh in the highest bracket of 30 per cent.

Chidambrams predecessors left the slabs untouched. The highest rate of 30 per cent still applies to those having an income of Rs 1.5 lakh as it did six years ago. The income-tax exemption limit continues to be Rs 50,000.

The ambitious development agenda in the common minimum programme (CMP) pre-supposes additional resources. One avenue is indirect taxation. The other is status quoism in the direct tax burden over the middle class.