Budget 2016: Don’t raise Income Tax exemption limit, says Economic Survey

By: |
New Delhi | Published: February 26, 2016 10:32:09 PM

Budget 2016: While tinkering with the Income Tax exemption limit year after year is a bad idea, FM Arun Jaitley also needs to look at hiking the Rs 10 lakh annual income limit for the highest rate of 30%.

So, FM Jaitley would do well by announcing a roadmap for restructuring of personal income tax slabs on the lines similar to what is proposed for the corporate tax, where the tax rate is to be brought down from 30% to 25% over four years beginning 2016-17 along with phasing out of exemptions. (PTI)Budget 2016: FM Arun Jaitley would do well by announcing a roadmap for restructuring of personal income tax slabs on the lines similar to what is proposed for the corporate tax, where the tax rate is to be brought down from 30% to 25% over four years beginning 2016-17 along with phasing out of exemptions. (PTI)

Budget 2016: Economic Survey pitches for curbing Rs 1 lakh crore subsidy to rich Budget 2016: While tinkering with the Income Tax exemption limit year after year is a bad idea, FM Arun Jaitley also needs to look at hiking the Rs 10 lakh annual income limit for the highest rate of 30%.

At a time when there is all-round expectation that finance minister Arun Jaitley will raise the income tax exemption limit from current Rs 2.5 lakh to at least Rs 3 lakh, the Economic Survey tabled in Parliament today has advised the government against tinkering with it.

There is no doubt that tinkering with the exemption limit has been done over the years as a measure to please the middle class and avoiding any major restructuring of the slabs.

But, chief economic adviser Arvind Subramanian has rightly pointed out in the Economic Survey that, “In the long run, if India is to stay “on the line” as its per capita income grows, it will need to build fiscal capacity”.

Against the general expectation from the Budget 2016 to be presented on Monday of a hike in the exemption limit for the individual taxpayers, the Economic Survey has gone ahead and has suggested: “One low hanging fruit that we suggested was to refrain from raising exemption thresholds and allowing natural growth in income to increase the number of taxpayers. In some ways, this would be reform through inaction”.

In fact, the exempted annual income limit, including various exemptions, is about Rs 4.5 lakh today, and there is a need to do away with the income tax rebates and have a composite exemption limit of, even if FM Jaitley ignores the CEA’s advice and raises the threshold, say Rs 5 lakh, to avoid unnecessary calculations and record keeping.

But, India’s real problem, though the Economic Survey has pointed out “where India does stand out, is in the number of individual income tax payers…the ratio of taxpayers to voters is only about 4%, whereas it should be closer to 23%”, is the highest I-T rate of 30% kicking in too early at the annual income of Rs 10 lakh.

At present, Rs 2.5-5 lakh income is taxed at 10%, Rs 5-10 lakh at 20% and the 30% rate is levied on income above Rs 10 lakh.

The top rate kicking in at a considerably lower income is seen as a major reason for suppression of income to avoid paying higher taxes.

So, FM Jaitley would do well by announcing a roadmap for restructuring of personal income tax slabs on the lines similar to what is proposed for the corporate tax, where the tax rate is to be brought down from 30% to 25% over four years beginning 2016-17 along with phasing out of exemptions.

A Rs 5 lakh flat tax exemption limit for individual taxpayers and no other deduction with the 10% rate applicable between Rs 5 lakh and Rs 10 lakh annual income, 20% between Rs 10 lakh and Rs 20 lakh, and the 30% rate for income above Rs 20 lakh, could be a possibility that can be looked at in a phased manner.

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.